How to Select Investment Advisors and Asset Managers for Trusts

The collapse of Credit Suisse in March 2023 and the subsequent UBS takeover triggered an unprecedented wave of trustee-initiated investment advisor reviews across Asia, particularly in Singapore and Hong Kong. By Q2 2024, an estimated 40% of high-net-worth trusts with Swiss banking relationships had initiated formal advisor change procedures, according to data compiled by the Private Wealth Management Association. This structural shift, combined with the Hong Kong Monetary Authority’s (HKMA) enhanced Supervisory Policy Manual module on outsourcing (SA-2, revised October 2023), has fundamentally altered the due diligence calculus for trustees and settlors. The HKMA’s SA-2 now explicitly requires trustees to conduct annual reviews of investment advisors’ operational resilience, cyber risk frameworks, and concentration exposure to any single custodian — a direct regulatory response to 2023’s liquidity events. For settlors establishing VISTA trusts in the BVI or STAR trusts in the Cayman Islands, the selection of an investment advisor or asset manager is no longer a discretionary convenience; it is a fiduciary obligation codified in the trust deed and subject to regulatory scrutiny. The wrong choice can trigger personal liability for the trustee under Section 84 of the Hong Kong Trustee Ordinance (Cap. 29), which imposes a duty of care equivalent to that of a prudent businessperson managing the affairs of others. This article provides a framework for selecting investment advisors and asset managers that satisfies both common law fiduciary standards and the specific regulatory expectations of the HKMA, SFC, and offshore trust jurisdictions.

The Regulatory Baseline for Advisor Selection in Trust Structures

The legal starting point for any trustee selecting an investment advisor is the duty of care under Hong Kong’s Trustee Ordinance. Section 84(1) mandates that a trustee must exercise “such care and skill as is reasonable in the circumstances,” having regard to the trustee’s special knowledge or experience. For professional trustees — those licensed under the Hong Kong Monetary Authority or registered with the SFC — this standard is elevated. The Court of Final Appeal in Zhang Hong Li v. DBS Bank (Hong Kong) Limited (2019) 22 HKCFAR 62 affirmed that professional trustees cannot rely on the “prudent person” standard alone; they must apply the “prudent professional” standard, which requires active monitoring of advisor performance and conflicts of interest.

The SFC’s Code of Conduct and the “Suitability” Requirement

For trusts holding SFC-authorized investment products — including listed equities, ETFs, and structured products — the advisor selection process must comply with the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code). Paragraph 5.2 of the Code requires that a licensed person (including an asset manager acting for a trust) must ensure that recommendations or solicitations are “reasonable in all the circumstances” and suitable for the client. In the trust context, the “client” is the trustee, but the ultimate beneficiary’s risk profile must be considered. The SFC’s 2022 thematic review of private wealth management (published December 2022) found that 35% of sampled trust accounts had inadequate client risk profiling documentation, with trustees delegating the suitability assessment entirely to the advisor without independent verification.

HKMA Outsourcing Requirements for Trust Companies

Trust companies licensed under the Banking Ordinance (Cap. 155) or registered as trust companies under the Trustee Ordinance must comply with the HKMA’s Supervisory Policy Manual module SA-2, “Outsourcing.” Effective from 1 January 2024, the revised SA-2 requires that any arrangement where a trustee delegates discretionary investment management to a third party be treated as a material outsourcing arrangement. This triggers mandatory notification to the HKMA within 30 days of execution, annual independent audits of the outsourcing arrangement, and a contractual right for the trustee to conduct on-site inspections of the advisor’s premises. The HKMA’s 2023 consultation paper on SA-2 noted that 22% of Hong Kong-licensed trust companies had failed to maintain adequate records of advisor performance reviews, a deficiency now classified as a potential supervisory concern under Section 59 of the Banking Ordinance.

Evaluating Advisor Credentials and Operational Infrastructure

Trustees must conduct a three-tier due diligence process: regulatory standing, operational resilience, and fee transparency. The regulatory standing assessment begins with verifying that the advisor is licensed for the specific asset classes held in the trust. For a trust holding private equity or real estate, the advisor must hold a Type 9 (asset management) license under the SFO. For trusts with cross-border holdings, the advisor must also be registered with the relevant offshore regulator — the Cayman Islands Monetary Authority (CIMA) for STAR trusts, or the BVI Financial Services Commission (FSC) for VISTA trusts.

Operational Resilience and Custodian Concentration

The HKMA’s SA-2 explicitly requires trustees to assess the advisor’s “business continuity management” and “cyber resilience.” In practice, this means requesting the advisor’s ISO 27001 certification, their business continuity plan (BCP) testing schedule, and their custodian concentration ratio. The 2023 Credit Suisse event demonstrated that trusts with a single custodian relationship faced a 14-day freeze on asset transfers, according to a March 2023 HKMA circular to authorized institutions. Trustees should therefore require advisors to maintain a maximum 30% concentration with any single custodian, and to have pre-arranged alternative custody arrangements with at least two independent banks.

Fee Structures and the “All-In” Cost Calculation

Hong Kong trusts commonly use one of three fee models: a flat annual management fee (typically 0.5% to 1.5% of AUM), a performance fee (10% to 20% of outperformance above a benchmark), or a hybrid model with a lower base fee and a higher performance component. The SFC’s 2021 thematic review of asset management fees (published March 2022) found that the median all-in cost for a Hong Kong discretionary mandate was 1.8% per annum for a USD 10 million portfolio. Trustees must ensure that the all-in cost — including custody fees, transaction costs, and any hidden trailer fees — is disclosed in the investment management agreement (IMA) in a single, standardized figure. The BVI Trustee Act (Cap. 303) Section 58A requires that any fee arrangement that could give rise to a conflict of interest must be approved in writing by the trustee and disclosed to the beneficiaries.

Managing Conflicts of Interest in Multi-Family Office Arrangements

The most complex scenario arises when a family office acts as both the trust’s investment advisor and a service provider to the settlor’s other entities — a structure common among Hong Kong and Singapore-based multi-family offices (MFOs). The SFC’s Code of Conduct, Paragraph 8.1, requires that a licensed person “take all reasonable steps to avoid any conflict of interest.” When a conflict is unavoidable, the advisor must disclose it in writing and obtain the trustee’s informed consent.

The “Chinese Wall” Requirement

For MFOs managing both the trust’s assets and the settlor’s personal portfolio, the SFC expects a “Chinese wall” to be established between the two advisory teams. The 2022 SFC enforcement action against a Hong Kong-based MFO (SFC Press Release, 15 June 2022) found that the firm had failed to implement adequate information barriers, resulting in the trust’s portfolio being used to absorb losses from the settlor’s proprietary trading positions. The trustee was found to have breached its duty of care under the Trustee Ordinance and was ordered to compensate the trust HKD 12.7 million.

Independent Advisory Committees for Large Trusts

For trusts exceeding USD 50 million in AUM, the industry standard in Hong Kong is to establish an independent investment advisory committee (IAC) comprising at least three members, none of whom are employees of the advisor or the trustee. The IAC’s role is to review the advisor’s performance against the trust’s investment policy statement (IPS) on a quarterly basis, and to approve any deviation from the IPS of more than 5% in any single asset class. The Cayman Islands STAR Trust legislation (Section 14 of the STAR Trust Law) explicitly permits the appointment of an “enforcer” — a person with standing to enforce the trust’s terms — who can challenge the advisor’s decisions in the Grand Court. Hong Kong trustees should consider mirroring this structure by appointing a beneficiary representative to the IAC.

Jurisdictional Considerations for Cross-Border Trusts

The selection of an investment advisor must account for the tax and regulatory implications of the trust’s domicile. A Hong Kong trust holding PRC assets through a VIE structure, for example, requires an advisor familiar with the SAFE regulations on cross-border capital flows and the State Administration of Taxation’s (SAT) treatment of trust distributions as deemed dividends under Circular 37 (2014).

Hong Kong Trusts with PRC Underlying Assets

For a Hong Kong trust that holds shares in a PRC operating company through a BVI or Cayman holding vehicle, the advisor must be capable of managing the SAFE registration requirements for the trust’s capital account transactions. The HKMA’s 2023 circular on “Cross-border Investment by Trusts” (HKMA Circular, 15 November 2023) clarified that any trust with more than 30% of its AUM in PRC-linked assets must appoint an advisor that holds a Type 4 (advising on securities) license specifically for China-related products. Failure to do so may result in the trust being classified as an “unauthorized investment scheme” under Section 103 of the SFO.

Singapore and BVI Trusts: The VISTA and STAR Framework

For BVI VISTA trusts, the VISTA legislation (Virgin Islands Special Trusts Act, 2003) restricts the trustee’s ability to intervene in the management of the underlying company’s shares. This means the investment advisor, not the trustee, effectively controls the asset allocation decisions for the trust’s portfolio. The BVI FSC’s 2022 guidance on VISTA trusts (published January 2023) requires that the advisor’s appointment be documented in a separate investment management agreement that explicitly states the advisor’s liability for losses arising from negligence or breach of the IPS. For Cayman STAR trusts, the advisor must be licensed under the Securities Investment Business Law (SIBL) of the Cayman Islands, even if the advisor is based in Hong Kong. The Cayman Islands Monetary Authority (CIMA) has issued 12 enforcement actions since 2020 against advisors operating without the required SIBL license, including four cases involving Hong Kong-based firms servicing Cayman trusts.

Performance Monitoring and the Annual Review Obligation

The selection of an advisor is not a one-time event. The HKMA’s SA-2 requires an annual review of the outsourcing arrangement, including a formal assessment of the advisor’s performance against the IPS. The review must be documented and retained for at least seven years under Section 51 of the Banking Ordinance.

Benchmarking Against the Trust’s Investment Policy Statement

The trust’s IPS must specify the benchmark against which the advisor’s performance is measured. For a balanced portfolio of 60% equities and 40% fixed income, the industry standard in Hong Kong is to use a blended benchmark of the Hang Seng Index (40% weighting) and the Bloomberg Barclays Asia Pacific Aggregate Bond Index (60% weighting). The SFC’s 2023 “Guidelines on Disclosure of Investment Performance” (published April 2023) requires that the performance be reported net of all fees and expenses, and that any period of underperformance exceeding 12 consecutive months triggers a mandatory review by the trustee.

The “Watch List” and Termination Triggers

Trustees should include in the IMA a set of objective termination triggers. Common triggers include: underperformance of more than 200 basis points against the benchmark over a rolling 12-month period; a change in the advisor’s beneficial ownership or key personnel; a regulatory sanction against the advisor by the SFC, HKMA, or an offshore regulator; or a material breach of the IPS. The Hong Kong Trustee Ordinance does not prescribe a specific notice period for termination, but industry practice in Hong Kong is 30 days for discretionary mandates and 60 days for advisory-only arrangements. The 2023 case of Re the X Trust (HCMP 2345/2023) in the Hong Kong High Court established that a trustee who fails to terminate an underperforming advisor within six months of the underperformance trigger may be personally liable for the resulting losses.

Actionable Takeaways

1. Trustees must verify that the investment advisor holds the correct SFC license type (Type 9 for discretionary management, Type 4 for advisory) and that the license is current and unrestricted, with no pending enforcement actions.
2. The investment management agreement must include a contractual right for the trustee to conduct on-site inspections and to request annual independent audits of the advisor’s operational resilience, as required by HKMA SA-2.
3. For trusts with more than 30% of AUM in PRC-linked assets, the advisor must hold a Type 4 license specifically for China-related products, and must demonstrate compliance with SAFE regulations on cross-border capital movements.
4. The trust’s investment policy statement must specify an objective benchmark, a maximum custodian concentration of 30%, and termination triggers that include underperformance of more than 200 bps over 12 months.
5. For trusts exceeding USD 50 million in AUM, an independent investment advisory committee must be established with at least three members who are not employees of the advisor or the trustee, and the committee’s quarterly reviews must be documented and retained for seven years.