Trusts are a great vehicle for investors who want to hold assets for beneficiaries and provide specific guidelines on how and when the money can be spent. Though typically used in family estate planning, trusts can also be very effective for communities looking to set aside and invest assets that will benefit their citizens over the long term.
Trusts are increasingly common among indigenous communities in Canada. Many communities have received compensation from settlement agreements, and they have a responsibility to safeguard the assets for the good of their community. Some indigenous communities receive funds through impact benefit agreements with mining or oil and gas companies, which give them a negotiated share of revenue from resource projects on their territories.
Trusts must align with community vision and values
Trusts can be customized to align with the unique values, needs and goals of each community, including how the money is invested, how it’s spent, and over what timeframe. Indigenous communities may use the funds to purchase land or buildings, develop infrastructure such as roads or community facilities, provide health-care services, or fund education such as youth scholarships. These decisions can be made by chief and council, or by holding a community referendum.
“Trusts really help in a number of ways,” says Jemison Jackson, Director of Indigenous Wealth at RBC Estate and Trust services, based in Calgary. “There is the benefit of having the cash injection, obviously, but also there is capacity-building and knowledge sharing,” adds Jackson, who leads the national team consisting of trust advisors and administrators. This team helps Indigenous groups across Canada ensure their assets are invested in a way that aligns with each specific trust agreement, and based on the types of investments the community prefers. For some communities, that may mean following environmental, social and governance (ESG) principles. Others favour a broader portfolio that best preserves the assets and provides steady, growing returns.
“Trust investing tends to be fairly conservative,” says Sangita Bhalla, a Winnipeg-based Regional Client Service Manager within the Indigenous Wealth team at RBC Wealth Management. “We tend to have a long-term approach, similar to foundations and pensions.” That means avoiding higher-risk investments in areas like technology or penny stocks, often in favour of larger public companies, including those that pay regular dividends.
Weighing capital preservation and income
“There’s always the tension, with any trust, between wanting to grow and preserve the capital and wanting to provide an income stream,” Bhalla says. Some trusts stipulate the capital cannot be spent; in order to preserve the assets for generations to come, only the income generated from the trust can be spent.
“A lot of the trusts we do now have annual income payments,” says Bhalla. The funds are transferred to the chief and council, who then determine the best use for the funds – whether that includes spending it immediately, or saving it for a rainy day.
Some trusts base payouts on a percentage, while others choose a lump sum. “Many of those decisions are wrapped up in a community’s own experience and needs,” says Bhalla.
Fostering financial stewardship
In many cases, the role of the wealth professional goes beyond managing the trust’s assets. “One of our biggest roles as a corporate trustee is to ensure our knowledge is passed on to the community,” says Jackson. “We work closely with investment managers to develop a policy statement, which sets out the objective for the trust in a way that suits the community’s appetite for risk, as well as what they want to see for returns.”
Jackson says some communities are more geared toward ESG investments, particularly if they’ve made a commitment to avoid investing in certain industries, such as energy, tobacco or alcohol. These decisions are often discussed in detail between the community leaders overseeing the trust, and money managers making the investing decisions.
Balancing returns with community objectives
Community leaders are increasingly interested in knowing and understanding all of the investment options available to them within the parameters of the trust agreement. They are also seeking greater transparency around each choice before deciding how to invest.
“Many of the First Nations communities that I serve across Canada are pleased to know that we incorporate ESG practices into the investment process,” says Gord Keesic, a Thunder Bay, Ont.-based institutional portfolio manager at Phillips, Hager & North Investment Management (a division of RBC Global Asset Management), and Head of PH&N Aboriginal Services.
Whatever their commitment to specific environmental or social goals, communities must ensure that their trust arrangement reflects their short- and long-term goals. “The investment plan needs to align with what they want to be able to do within their community,” says Keesic, who is also a member of the Lac Seul First Nation in Ontario. “And so, there will be certain financial goals that they will want to achieve in order to finance those plans.”
Communities always have ideas about how best to distribute their funds. These may imply a targeted long-term rate of return so that the funds can be used to benefit the community long term. “Once we have an idea of the community’s preferences and expectations, we can come up with some investment options for them — and draft a plan that suits their risk tolerance,” Keesic says. “The risk-return dynamic is, of course, central to our discussions, and the acceptable trade-off will differ from one community to the next.”
There is a high level of accountability in working with trust agreements in indigenous communities. “They expect us to show them how their funds have been invested, and how their investments are generating income,” Jackson says. “That provides a lot of comfort to community members — to know their money is being looked after, and that chief and council are spending it responsibly.”
It’s part of vision-building in the communities. “Trusts can support their long-term vision and affect change,” Jackson says. Witnessing the results of responsible stewardship is one of the most rewarding parts of managing indigenous community trusts, says Bhalla. “It can really make the difference between someone being able to start a business and be self-sufficient, or participate in an activity they wouldn’t have otherwise had access to,” says Bhalla.
“What’s great to see with this money — which has been so difficult to achieve — is how it’s making a difference in peoples’ lives.”