Risks associated with the investment and management of third-party funds

by Johannes Fiala, Lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de)
On the duties of a lawyer and tax adviser in the management of third-party assets – in particular in the investment of wards’ money – in escrow or trust accounts
Due to faulty investment advice and asset management at credit institutions, the issue of liability in these cases has become very important, especially recently. This can also become a problem for lawyers if they are held liable for faulty asset advice or investment advice. This is also true for tax advisors, who often perform the same tasks. For the questions that arise in this context, it is important to know what obligations a lawyer or tax advisor has when he manages another person’s assets. What are his duties and how far do they extend?
I. Current problems: The background to all these questions are the following problems and issues from the practice of lawyers (or also of tax advisors) with the handling of third-party assets – in particular with the administration of trust accounts: A lawyer or tax advisor is entrusted with the management of a trust account. He leaves a larger amount in a current account for several weeks and does not invest it in the form of a savings account or, for example, as a time deposit, even though this would yield better interest. Does an attorney or tax advisor have to manage the trust account so that assets are always increased? Or is it sufficient if the money remains in the current account? Has a lawyer or tax adviser breached existing duties if he invests the money in a trust account not at an interest rate of 3.7% but at a rate of 3.5%? When managing the trust account, does a lawyer or tax advisor have to look for the best investment opportunity at all and obtain offers from various local banks, or is it sufficient if he turns to a bank with which he cooperates? If so, how many bids need to be obtained? To what extent must a lawyer or tax advisor inform his client about the management of the trust account? Even if in the following the tax adviser is no longer expressly mentioned, the explanations are also to be applied to a tax adviser.
II. definition: asset management Distinction between asset management and investment advice: 1.) Definition of asset management and investment advice: An investment adviser is commissioned by the investor to provide him with expert advice on the evaluation and assessment of a particular investment decision, if necessary taking into account his personal circumstances. The consultation of an advisor takes place, because the investor of it an increased correctness of the decision which can be made by it due to preceding comprehensive information about all aspects of an investment hopes. Asset management, on the other hand, involves the task of managing and increasing the assets of others. In this activity, he is responsible for the proper administration of the assets, but not for a certain economic success. In summary, it can be stated that both – the asset manager and the investment advisor – are responsible for the assets of others. However, they do not commit themselves to the achievement of a financial success by this capacity or activity alone, since this depends on various factors which lie outside their sphere of influence. However, in contrast to the investment adviser, the asset manager makes asset dispositions without prior consultation with his asset holder. The investment advisor exclusively advises. 2.) Legal forms of asset management: The asset manager acts either as a trustee or as an agent. In the latter case, the principal remains the owner of the assets to be managed. The asset manager is merely authorized to manage the assets as the representative of the owner of the assets and to give instructions to third parties on the reallocation of the assets. In the case of the trust model, the asset holder transfers the assets to be managed to the manager and merely acquires a retransfer claim. The asset manager as trustee is given ownership of the assets to be managed by him, which means “more” than the asset manager as representative. In the following, only the trustee-asset manager will be dealt with.
III.) The nature and form of the fiduciary relationship: In addition to banks and private asset management companies, asset management is also carried out by members of the liberal professions, especially auditors, in the form of fiduciary relationships. For banks, asset management is a banking business subject to approval in accordance with §§ 1 Para. 1, 32 of the German Banking Act (KWG). Therefore, the approval of the Federal Banking Supervisory Office is generally required, since the acceptance of third-party funds already constitutes a deposit transaction pursuant to § 1 para. 1 sentence 2 no. 1 of the German Banking Act (KWG). The KWG does not apply to a lawyer, tax advisor, notary or guardian. The basis for all asset management in the trustee model is the fiduciary relationship between the asset holder and the asset manager. This arises from the fact that the settlor transfers trust property to a trustee in trust so that he can use it for a specific purpose.  In a broader sense, it is also understood as an agreement that someone should acquire a thing or a right in his own name but for the account of another and separate it from his own property, e.g. a trust agreement. If the asset manager acts as trustee, the form of the trust relationship with the settlor must first be determined, since a distinction is made between the disinterested trust (administration trust)  and the self-interested trust (security trust).   For the latter form, the most important case is the transfer by way of security. Asset management, on the other hand, is a typical case of management trust. In addition to these two forms, there is also the so-called double-sided trust, in which the elements of both the management trust and the security trust are present. An example of a two-sided trust is the case of a trust liquidation settlement, the purpose of which is to deliver the debtor’s eligible assets to the creditors with the intervention of a trustee, the trustee having rights and obligations towards both parties. In addition, there is also the empowerment trust, which is also referred to as a non-genuine trust. Unreal, because the settlor remains the holder of full rights and merely authorises the trustee to dispose of the trust in his own name via § 185 BGB. In the following, only the management trust will be discussed here, as it represents the typical form of asset management.
IV.) Legal basis for the administrative trust: The Reichsgericht has already stated: ‘There is no such thing as a typical trustee contract; the legal relationship must rather be determined according to the respective circumstances, in particular according to the underlying mandate? . A special statutory regulation for the trustee contract does not exist. The regulations on the contractual relationship (§§ 662 ff BGB) therefore apply via § 675 BGB. The concrete circumstances of the individual trust order are decisive. The Higher Regional Court of Cologne recently stated in connection with the liability of a trustee due to breach of the duty of disclosure that the duties of the trustee arise from the law §§ 675, 664-667 BGB, from the respective contractual relationship, from the professional guidelines (lawyer, tax consultant, auditor) and from the general principles of proper trusteeship, in particular the principle of independence and the safeguarding of interests.  If a trust agreement exists, the individual provisions of the specific trust agreement must first be used to determine the trustee’s duties. Then it is necessary to go back to the next stage: the legal form of the mandate or agency agreement, as well as the fiduciary relationships regulated by law.
V.) Duties of the asset manager as administrative trustee: 1. General duties: There is the duty of loyalty and the duty of care, and their determination must be based on the individual case, as has already been discussed above. However, all fiduciary relationships have one general duty in common, namely the duty of loyalty. This arises from the nature of the trust relationship itself and the underlying transaction. The legal nature of the trust itself is that of a transfer of full rights with a limitation under the law of obligations.  The trustee may do less under the law of obligations than he can in rem. In rem, the trustee becomes the owner or holder of the right with full power of disposal. Under the law of obligations, however, the trustee must dispose of the trust property in a certain way, since it has only been transferred to him in trust for a certain period of time. The BGH  has stated in this connection: The trustee’s duty to look after the interests of the settlor is based on the fact that, on the one hand, the trustee has sole power of disposal over the object entrusted to him and, on the other hand, the settlor is still interested in the preservation and possible high realisation of the trust property’. On the basis of the fiduciary duty, the trustee must look after the interests of the settlor as laid down in the contract. For the asset manager as trustee, this means that he must safeguard the interests of the trustor. The trustee may not dispose of the amount entrusted to him in any way other than that determined by his settlor. This is a primary duty of the fiduciary relationship. If the lawyer violates this duty, he is liable to prosecution under § 266 StGB. From the duty to protect the interests of the settlor in good faith follows the obligation to carefully execute the mandate connected with the trust agreement. The duty of care may be limited in individual cases by the fact that this results from the purpose of the trust relationship or the asset management.
(2) Other special duties: In addition to the duty of loyalty and the general duty of care, further individual duties arise from the fiduciary relationship for the asset manager. a) Pursuant to § 664 of the German Civil Code, the trustee as asset manager must personally execute the trust transactions. He may only use assistants. b) The asset manager must also open his own accounts and keep the money separate from his own assets. The typical case here is the client account of a lawyer. In this case, the latter may not mix his office and/or private assets with those of the asset provider. (c) The lawyer shall keep a register. There he has to note the receipt or the exit of the money. Separate accounting is therefore required for this purpose. d) The asset manager must also manage the assets entrusted to him in accordance with the individual provisions of the trust agreement and otherwise in accordance with the aspects of proper management, i.e. above all invest them profitably. Profitable means that, of course, current or one-off costs of the investment are to be kept low within the scope of possibilities. Proper administration means, first of all, that the trustee must follow the detailed instructions of his settlor exactly and administer the funds in accordance with the settlor’s provisions: The trustee must always check whether the transaction on which his trust is based is void, because he will then regularly have to pay his remuneration in accordance with §§ 681 S.2, § 667 Alt.1 BGB again, these at most in accordance with § 817 p.2. BGB might keep.  Furthermore, the trustee must check whether he is acting in a managerial capacity (representative trusteeship, as in the case of the builder-owner or purchaser model) or merely in a supervisory capacity (as in the case of a mere role in the use of funds): as a rule, according to the insurance conditions of the liability for pecuniary loss, the managerial trusteeship is not insured, unless it concerns one of the trustee professions listed enumeratively there. In the absence of detailed provisions of the Settlor, the administration shall be carried out in accordance with the criteria which a reasonable person, in particular a person thinking in economic terms, would take as a basis.  Here, the asset manager must adhere to general rules that have evolved over time. Coing refers to these as “rules of experience and wisdom”. However, proper management also means that the asset manager operates a productive management without being responsible for the success (increase in assets) of his activity, as already stated above. Strict requirements have always been placed by the courts on the proper administration of assets.  The BGH  has, for example, laid down the following requirements for the executor of a will: ‘The executor must always bear in mind that he has to administer the assets of others; this means that he has to preserve and safeguard these assets, prevent losses and ensure their use’. The same applies to a guardian or administrator of an estate as well as to a guardian or custodian. These principles must also apply to the legal trustee, since they are both required to administer the assets of others properly. For the executor of the will this obligation was expressly laid down in the law (§ 2216 (1) BGB) and for the trustee this arises from the fiduciary relationship, as already explained above. From the formula established by the BGH, the general principle for the trustee as trustee can be inferred that the trustee must be guided by the objective of preserving the assets in their economic value as far as possible. This objective, which the asset manager is supposed to achieve, can often be achieved in various ways. In this respect, the trustee has discretionary powers.  However, the discretion granted to the trustee regarding the management of the assets is not limitless.  This is already apparent from the requirements for proper asset management laid down by the Federal Court of Justice for the executor of a will. First of all, the asset manager must deduce from the purpose of the trust agreement which objective he must primarily pursue, i.e. either the preservation of assets or the generation of high income. Often, investment guidelines are also agreed between the asset manager and the asset provider. From these, the trustee must then determine how to manage the assets properly. If the trustee has no clear instructions regarding the management of the third party’s assets, the general principles of asset management apply in respect of a trust account. In particular, he may not exceed his discretionary powers if his action would result in damage to the assets to be managed.  In a recent decision, the Federal Court of Justice (BGH) described the general principles for asset management in such a way that professional asset management does not rely exclusively on high-risk option transactions, but attaches importance to an appropriate mixture with conservative forms of investment such as shares and fixed-interest securities. It follows from this that, as far as the asset manager’s discretion is concerned, he is in principle precluded from making highly speculative investments. In case law it was decided for the asset manager as guardian in this respect that one of the investment options not prescribed by law is also possible if the free investment of money offers the ward special economic advantages and is equally safe. According to case law, it is also possible for a guardian, without committing a breach of duty, to invest 5% in Canadian government securities in derogation of the statutory provision. However, this is only possible after an examination of the security and the profitability (which is significantly better than an investment in Germany) has been carried out by an expert opinion of a banking association or the Federal Banking Supervisory Office.   Although these decisions concern the management of assets by a guardian, the principles can be applied to the lawyer as asset manager, even if he is not a court-appointed asset manager and there are no statutory provisions concerning the management of the assets. Both must always bear in mind that the management of the assets entrusted to them must be carried out in the safest, most economical and prudent manner. The BGH has defined these requirements  for a lawyer as asset manager is summarised as follows: The administrator must above all take into account the principles of profitability and be careful to invest the assets entrusted to him in a safe and profitable manner. From the above decisions and the general principles of asset management established by the Federal Supreme Court, it can be seen that, according to case law, it may be permissible to invest a portion of very large assets in shares. Under no circumstances, however, may the asset manager invest the entire assets entrusted to him in a speculative manner.  For smaller amounts, a speculative investment is ruled out from the outset, as otherwise the entire amount is at risk. It also follows from the above that the asset manager has discretionary power in the investment of the money. The criminal law aspects must also be taken into account here. In this case § 266 StGB comes into consideration. This is relevant if risky transactions are carried out contrary to the instructions of the trustor. However, a lack of increase in assets is already sufficient to assume a violation of §266 StGB. It does not matter whether the transaction carried out in breach of duty is actually profitable.   The discretion which the lawyer has with regard to the various forms of investment is thus limited by the non-use of this discretion. In addition, there is a further limitation in that the trustee must manage the assets in such a way that no losses occur which already result from the chosen form of investment from the outset. This duty exists for every asset manager, even if he is not responsible for the success of his activity. In this respect, it is clear to the guardian that it is not sufficient for him to be content with a savings deposit with a statutory period of notice or even with the investment in a current account, even if minimal interest is paid on credit balances there.   In so doing, it would be in breach of the principles of sound financial management. In a newer decision it was stated for the guardian that the longer investment on a savings book with legal period of notice at the basic interest rate represents a duty injury, if the ward is straight 6 years old, and the ward money for the current maintenance and for the covering of expenditures is not instructed and with approx. 27,000, -DM a substantial cash fortune on the savings book accumulated. Even if the requirements for a guardian with regard to the investment of assets are considerably higher, since he is already obliged by law to certain forms of investment, it can be inferred from these obligations for a guardian that an economic administration of other people’s assets also includes making a dutiful selection from among various investment possibilities. Because of this limitation on discretion, the attorney breaches a duty under the fiduciary relationship if he leaves a large amount of money in a checking account without interest for a period of more than two to three weeks. In this case, he must respect the interests of the asset provider and act accordingly. In such cases, the settlor’s assets may be at risk of greater damage. This obligation can also already be inferred from the principles established by the BGH  for a lawyer as an asset manager. The latter is obliged to invest the assets entrusted to it safely and profitably. A new decision of the Federal Court of Justice (BGH) concerning the obligation of a notary to provide information in the case of fixed-term deposits invested in an escrow account goes in this direction. The court comes to the conclusion here that, in view of an amount of DM 217,195 in the notary’s escrow account, a notary has a duty to point out to the trustor that the amount can be invested at a fixed rate of interest for 30 days at a time. This obligation must exist above all if – as in the case decided by the Federal Court of Justice – such conditions are granted by the bank that the availability of the deposited sum of money in the notary’s escrow account is guaranteed at all times, even in the case of an investment as a fixed-term deposit, and, moreover, the premature withdrawal of the money merely has the consequence that the interest rate for the commenced period is reduced to that of a current account. The basic ideas of this judgement are to be transferred also to the lawyer’s trust account. In view of the large sums of money in the escrow account, the lawyer is also obliged to at least point out to his client that it is possible to invest the money more advantageously. It is also possible to make the investment in the form of a savings book. Here the legal period of notice exists, but if it is foreseeable that the money will lie for a longer period on the escrow account or trust account, then the lawyer must decide which more interest-favorable form of investment he selects in relation to the interest-free current account in the interest of his client. However, you can’t expect a lawyer to figure out the most favorable type of investment in the first place. It should be sufficient if the lawyer informs himself about the interest rates of the local banks by reading the daily newspaper and then chooses his type of investment. For a conversion from one type of investment to another, the trustee must also dutifully exercise his discretion with regard to the form of investment, i.e.. there must be an objective reason for this, such as a higher interest rate as mentioned above. An objective reason could also be a quicker access possibility in case of an early need of the amount of money.
3.) Special duties with regard to the management and opening of an escrow account by the lawyer as asset manager: The lawyer as asset manager does not have the duty to file a report pursuant to § 33 ErbStG in the event of the safekeeping of third-party funds in an escrow account. The duty of confidentiality and the right to information pursuant to section 102 para. 1 No. 3 AO are in fact stronger. Disclosure of a client’s name and address is generally subject to the attorney-client privilege. However, due to the Money Laundering Act (GWG), a bank will no longer open a client account for the lawyer if he refuses to disclose the name and address of the client, since the bank, for its part, would be committing an administrative offence according to § 17 para. 2 No. 1 GWG would be committed. According to § 3 para.1 GWG, a lawyer acting in a fiduciary capacity must, when accepting cash worth DM 20,000 or more, first identify the person appearing before him. The lawyer must therefore, unless an exception applies, establish the name of the person making the payment on the basis of an identity card or passport, as well as the type, number and issuing authority of the identity card or passport presented. Furthermore, the lawyer must establish the address as well as the date of birth of the person to be identified, insofar as these are contained in the aforementioned identification documents (§ 1 Para.5, §9 Para.1 GWG). In addition, the lawyer must also establish the beneficial owner and, if necessary, record the name and address of the person for whose account the person to be identified is acting (Section 8 GWG). Due to the Money Laundering Act, the lawyer is therefore obliged to break the lawyer’s duty of confidentiality and to disclose the necessary information to the bank. However, this may only be done if there is an exceptional circumstance, for example the consent of the client. This should be given in writing, if possible, so that he does not find himself in need of evidence after the opening of the escrow account in the event of a dispute due to a breach of the duty of confidentiality. 4.) Information of the settlor: Furthermore, the lawyer as trustee also has the duty to inform the settlor. This obligation results from §§ 666, 675 BGB. The asset manager must therefore regularly inform the settlor about the management.   The type and scope of the duty to inform may already be stipulated in the trust agreement or asset management agreement. Regular information is customary, depending on the duration of the asset management, e.g. monthly, semi-annually, etc.  In the absence of an agreement on the duty to provide information, the Manager shall, at least when the Trust Property is at risk, notify his Settlor and obtain his instructions.  With regard to the protective effect of the possibility of terminating the agency agreement, the Federal Court of Justice held that the asset manager must inform the asset holder immediately after the occurrence of substantial losses.  However, the BGH leaves open whether the materiality of the losses can only refer to an individual investment or always has to be seen in relation to the entire assets under management. However, in view of the purpose of the information, namely to give the asset manager the possibility of revoking the asset management contract, the entire assets must be taken into account. The decisive factor must therefore be the risk to the entire assets. Furthermore, it remains open whether the occurrence of book losses already triggers the asset manager’s duty to inform or whether actual losses must be present. According to the ratio legis, book losses are already sufficient to justify the lawyer’s duty to inform. The term “substantial” also remains to be clarified. In the above-mentioned decision, the BGH assumed a loss of 20%. In the case of portfolios that are not managed speculatively but conservatively, the loss percentage that triggers the duty to inform for the asset manager should be set much lower. Here, the risk of endangering the assets is fundamentally much lower. The point at which the duty to inform is triggered thus depends on the individual form of investment. Schäfer, for example, affirms the duty to inform when there are (realised or book) losses of 5% for a portfolio invested in bonds.
VI) Standard examples for decisions of the asset manager It is not possible within the framework of this paper to present the entire deposit business of the banks. Therefore, some prominent decision possibilities as well as alternative providers on the market for financial services (e.g. investment fund companies) are to be addressed here by way of example: 1.) On the extent of the use of current accounts Credit institutions usually charge fees for account management. These are in particular booking fees, turnover commissions, account management fees and expenses – such as postage for sending account statements. In this context, it should be noted that there are some banks that offer fee-free account management: This is ultimately also a question of negotiating skill. The omission of these ongoing costs for account management alone can increase the return on investment or asset management not inconsiderably. Due to the at best marginal interest rate of credit balances, the asset manager should, as far as possible, dispose of the account in such a way that the current credit balance is sufficient for the payment of liabilities due in the near future and for an adequate manoeuvring mass for the settlement of unforeseen payment obligations.  This can be justified by the fact that it would not be economical for the creditor to incur interest on arrears and reminder costs. With regard to the investment of sums of money in excess of this, only in rare exceptional cases must a possible obligation to file for bankruptcy in the event of so-called insolvency be taken into account. For the guardian and similar asset managers it applies that already the investment of money in a savings bank on a savings book with a legal period of notice regularly represents a breach of duty because of the low interest rate. In the meantime, the payment of hidden commissions is likely to have become an issue for asset managers, and not just on the margins when investing money: In connection with the increasing competition of financial services companies for investments, it happens in practice that even renowned institutions blatantly offer the asset manager a commission – payable in particular to an account abroad – for the transfer of assets to accounts of their own company: After this procedure after the Ver-nehmen with investment of funds switching over tax counsels is not unusual and with attorneys to increase, may be reminded at this point briefly of §§ 670, 667 Alt.2 BGB. The payment of commissions to professionals can be permissible – as long as there is no fee payment or man-dat in direct connection. If a professional wishes to collect a commission from both sides, i.e. acts like a broker, this must be disclosed to both sides in advance so that the commission claim does not lapse altogether due to a collision which is, as it were, concealed. Even if the acceptance of commission does not yet constitute a second profession which is possibly incompatible with professional law, this regularly constitutes commercial income within the meaning of the EStG. This has the consequence that without separate booking with the professional, the entire surplus or law firm profit can be “infected”, with the consequence of personal trade tax liability also related to an individual case consideration of actually freelance income or turnover. Finally, it should be pointed out that already according to legal regulations an investment of money in a current account can be forbidden: An asset manager, in particular a tenant or property manager, is prohibited from investing money in current accounts – and even more so from mixing outside money with his own investments in personal accounts – if it is a matter of deposits, § 550 b Para.2 S.1 BGB, § 266 StGB. 2.) The investment of money at the savings interest rate as a liability trap According to the practice of numerous asset managers, considerable sums of money are often only invested in savings books or as so-called fixed-term deposits at similar conditions. Regular investment within the meaning of § 1807 BGB is also likely to correspond to the usual practice at numerous guardianship and probate courts and youth welfare offices. This is due in particular to the fact that the courts can initially only monitor the asset manager’s compliance with the limits of dutiful discretion in the investment of wards’ money.  The initiative for a lucrative investment must therefore come from the asset manager, if only to avoid personal liability for negligent breach of duty. The duty of supervision, in particular of guardianship and probate courts, is initially limited to inquiring about the whereabouts and use of the sums of money with the professional asset manager within a reasonable period of time.    The guardian shall be advised in writing of his duty to invest his ward’s property in an interest-bearing manner.  Current accounts are unsuitable as wards unless they are directly required for the receipt of payments or to meet necessary expenses. In this connection, official liability could be considered – in the absence of the privilege of a court judge – first of all in the case of the official guardian in accordance with the principles of the official duty of care. Moreover, the supervisory function of the guardianship court in particular will have to meet increasingly stringent requirements, if only because an increase in guardianships and guardianships by non-professionals can be observed, who usually do not have any commercial training and therefore do not always offer sufficient guarantee of the personal suitability required for asset management: This includes social pedagogues as personally appointed guardians as well as some guardianship associations. In such cases, the guardianship court will have to make sure or require the guardian to have sufficient liability insurance which, especially in the case of association guardians, also covers financial losses from money transactions. This also applies mutatis mutandis to the case that the probate court appoints a curator or administrator who, due to the lack of chamber membership, does not have to maintain a property damage liability insurance within a statutory minimum framework, §§ 839 III, 254 BGB.  It is noteworthy that these types of asset managers – with a view to their own range of duties and personal liability even for simple negligence – are referred to in the literature as ‘sovereignly appointed trustees’. Particularly in the case of larger assets, it is overlooked that the duty is imposed on the professional asset manager (guardian, custodian, caretaker) to examine whether an alternative investment within the meaning of § 1811 BGB comes into question. In contrast to the aforementioned manifestations of quasi sovereign asset managers, the executor of the will initially has a far greater scope of discretion in the investment decision, so that even a purely speculative investment with a high risk and considerable expected returns can still be proper.   The executor of a will is virtually expected to take advantage of opportunities for above-average investment returns.  It should be noted, however, that the testator could restrict the scope of the executor’s duties more closely, which may result in a different duty position for the investment of funds in individual cases. In the absence of an agreement with the settlor, i.e. as a rule in the case of a professional asset manager in the above sense, discretion is initially required in the question of the “correct” investment in each case. In the absence of an agreement with the settlor, i.e. as a rule in the case of a professional asset manager as defined above, discretion must first be exercised with regard to the question of the “correct” investment of funds in each case, in accordance with §§ 1807, 1808 and 1811 of the Civil Code, in order to then reach a decision of his own.  In doing so, the dutiful discretion must be directed towards the most economical type of investment. This corresponds to an obligation on the part of the asset manager to inquire about economic – and, depending on the situation, sufficiently liquidable – investment opportunities at short notice: Despite much higher interest rates, the purchase of savings bonds, for example, which cannot be redeemed for years, would be open to attack. The prerequisite for investing money elsewhere or switching to another credit institution is that a particular economic advantage results. Special reasons for the permission of the investment with a large bank are not necessary: Therefore small interest differences of for example 0.25% per annum do not form an approach for a breach of duty of the trustee and represent all the more no order to be approved to the guardian or Pfleger of the court, § 1811 p. 2 BGB.  From this it follows for the professional guardian that no permission is required for a reallocation back into a form of investment according to § 1807 BGB. According to the case-law already referred to above, it would be negligent for a previous owner to invest an amount of DM 27,000 which was not intended for immediate consumption or which was not needed for years, merely at interest on savings. On the other hand, a guardian – for example with a view to the ongoing home costs of the person being cared for of several thousand DM per month – may well leave an amount many times that amount in a savings account. Since a forecast of the need for money in the future therefore plays a role in the exercise of discretion, the limit of permissible discretion must be oriented to the individual case. The guardian of the estate, for example, who may still have to determine the heirs, could well feel that the investment of the net estate at the savings interest rate is no longer in the interest of the still unknown heirs because of the usual duration of the proceedings in the case of the pending determination of heirs. In the case of the trustee in bankruptcy and probably also of the administrator of the estate, whose offices aim at a rather than immediate settlement, a medium or long-term investment of money will only occasionally come into question.
3.) The gilt-edged investment according to § 1807 BGB In general, it can be said that gilt-edged investments involve a particularly large bonus for the debtor, often combined with a lower profitability compared to the other investment opportunities available. In particular, these are funds for the repayment of which the Federal Government, a Federal State or another body, in particular a local authority, is liable.  Furthermore, this also includes special claims secured by real estate liens. Prior to the Second World War, the Ministry of Justice declared certain bonds to be ward-protected – since then, the legislator has regulated this in individual laws on the occasion of, in particular, the creation of credit institutions. With regard to the prior duty to inquire and the subsequent exercise of discretion, the asset manager will have to bear in mind that credit institutions will regularly primarily follow their own economic interests: Because of the minimum reserve obligation, which exists to a lesser extent  it will be more profitable for the credit institution to recommend a savings account if the interest rate on the investment is the same.  When investing in a fund, a credit institution will possibly also make sure that, in case of doubt, a fund with a higher bank commission is brokered. Finally, the credit institution will possibly not propagate forms of investment which it does not offer itself in its own range of investment possibilities, i.e. which it would first have to procure itself. From this it can be easily deduced that in the case of larger assets, special requirements must be placed on the selection or training of an asset manager.
4.) According to the criteria developed for § 1811 of the German Civil Code, economic asset management takes place in the area of conflict between the requirement to preserve substance (security of the financial investment) and the obligation to increase substance (risk of the financial investment). It should be noted that no investment is risk-free and that experience has shown that increasing returns are accompanied by a higher risk that the intended benefits within the meaning of § 100 of the German Civil Code (BGB) will result in a de facto reduction in assets. A higher profit potential in the investment of money is therefore regularly associated with a higher risk.
After the asset manager has to pay attention first of all to the security of the investment, the principles of deposit protection should be addressed at this point. In the case of private banks, approximately 30% of the liable equity capital is covered by the deposit guarantee scheme in the sense of direct deposit protection: the exact amount of the liable equity capital per institution can be obtained from the Association of German Banks: according to the amount of the liable equity capital, which can be easily determined by inspecting the annual report, assets of several million DM are also regularly covered by the deposit guarantee scheme. In the case of savings banks and cooperative banks, on the other hand, the principle of institutional protection applies, which is tantamount to protecting the existence of the credit institution or the continued existence of customer claims in the event of a restructuring merger. The scope of this protection is usually sufficient even in the case of assets worth millions, so that the asset manager only has to read the account opening documents carefully before signing: Because according to § 23 a KWG it would have to be stated there if the credit institution in question does not belong to a deposit insurance scheme.  In the case of instalment banks without a licence pursuant to Section 1 of the German Banking Act (KWG), there is generally no deposit guarantee. For the sake of completeness and with a view to § 266 StGB (German Criminal Code), it should be pointed out that none of the deposit guarantees gives rise to an actionable legal claim on the part of the bank customer or the credit institution: This is primarily for tax reasons. In this respect, in practice, many a judicial enquiry with a banking association about membership or the specific amount of deposit protection should be superfluous. According to an EU directive, a direct claim of up to 20,000 ECU (which would currently be more than DM 40,000) of the investor should exist in the future – however, this regulation is currently being fought by the Federal Republic of Germany, so that the decision of the ECJ remains to be seen.
For the professional asset manager, there are numerous possibilities to choose from for an investment of money in the sense of § 1811 BGB. Because of the comparatively low risk on the one hand and because of the often increased expectation of return on the other, so-called investment share certificates are particularly suitable for investment in securities. These securitise – at least insofar as they are domestic companies authorised under the KAAG – the shares in an investment fund as securities. In an investment fund, an investment company pools the money of many investors in order to invest it in various assets according to the principle of risk diversification and to manage it professionally.  In addition, the classical securities according to § 1807 of the German Civil Code (BGB) have a term of one or more years and are therefore more suitable for medium and long-term investments. Investment share certificates, on the other hand, can generally be liquidated at any time. a) Bond funds – in particular near-money market funds Near-money market bond funds are primarily composed of securities with short residual maturities and money market instruments. As a rule, such funds have the following special features which make them appear particularly suitable as an investment for an indefinite period: * Custody accounts for the management of investment units can be held directly with the managing investment company. This is usually less expensive than having the shares held in a custody account at a credit union. The custody accounts are maintained free of charge or for a comparatively small fee. The issue surcharges incurred when investing in near-money market funds range from a mere 0.1% to 0.5% of the investment amount, depending on the size of the investment. * The interest or return can be in the range of two to three times the interest on the savings interest. The effective return (after tax) for the ward, the person being looked after or the – possibly still unknown – heirs or the other trustor is additionally increased by not inconsiderable tax-free income (from experience around 20% of the gross income), in particular from price increases. * These are open-ended funds (special assets) that are held separately from the assets of the investment company. Open-ended funds guarantee availability and liquidation on each trading day. This also represents a cost advantage, because in contrast to the savings book, no advance interest (penalty interest in the amount of � of the credit interest of the savings book) is incurred for short-term disposals in an amount of more than DM 2,000 per month. * The asset manager can rely on a large number of individual approvals – also on file with the competent professional association – in accordance with § 1811 BGB by guardianship or probate courts, concerning fund investments of various kinds. This approval practice has existed since at least 1991. According to the licensing practice, open-ended real estate funds and other pension funds also come into question for ward money investments:  Closed-ended real estate fund units, on the other hand, are as a rule hardly realisable on a so-called secondary market ahead of time, so that they can at best come into question as long-term asset investments. The decisive factor here is that the asset manager obtains information on the investment policy of the fund company and a comparative study of the return or performance of the fund units in relation to the past years. In individual cases, it will have to be examined in the case of larger investment orders whether an additional hedging of the cash investment return by means of a side letter  would be enforceable. Within the framework of due discretion, the asset manager will examine – also with a view to the costs and probable duration of the investment – whether a partial investment in a standard non-money market bond fund is advisable. b) Equity funds – in particular with a redemption guarantee On the international market, including in Luxembourg, equity fund investments are offered which are linked to a redemption guarantee. Afterwards the investor can be sure that he will get back his invested capital in any case. Such funds will only be offered in Austria as a result of the 3rd Financial Market Promotion Act. In order to answer the question of whether a partial investment in such funds is to be regarded as safe, it is particularly important to consider the enforceability and value of the redemption guarantee under the applicable legal system. The literature sometimes refers to the possibility of obtaining an expert opinion from a banking association or the Federal Banking Supervisory Office on the question of the security of investment fund investments in particular. However, this indication is incorrect and in practice leads to pointless inquiries via various local courts, and thus in the end to an avoidable delay in the decision of the Rechtspfleger on the approval of § 1811 of the Civil Code. In particular, the Federal Banking Regulatory Commission does not wish to place itself in a personal information liability position, C.I.C. i.V.m. § 328 BGB analog. Within the scope of the tasks assigned by law, it may be asked whether the investment fund units are issued by a company domiciled in Austria and whether the investment company is subject to supervision pursuant to the KAAG. For the rest, inquiries from local courts always refer to the fund’s sales prospectus.
Summary: In conclusion, every lawyer and tax adviser can only be advised to make a written agreement with the client when taking over an asset management in the form of a fiduciary relationship. This should regulate as detailed as possible under which circumstances orders may be made. Above all, the type of investment and interest rate should already be specified there. If the trustee has to take into account the conflicting interests of several persons, it should be precisely determined who may give instructions to the trustee. The professionally or sovereignly appointed trustee is advised to make sure that his decision in favour of a certain type and manner of investment is still within the scope of his dutiful discretion. This should be regularly checked and documented so that disputes with trustors are excluded.

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Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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