Prudent Investor Standard

The Prudent Investor Standard establishes specific considerations that a fiduciary must take into account when making financial decisions on behalf of another person. The standard relies on fundamental economic principles to establish what distinguishes “prudent” from “imprudent” decision-making. Not all factors contained in the standard will be present in every decision you make, but they will be present in most. As a fiduciary, you are legally obligated to familiarize yourself with this standard and to act accordingly.

Before getting into the technical details, remember this: the Prudent Investor Standard is defensive in nature. It is more concerned with preventing avoidable financial blunders than it is with achieving market-beating returns. Its purpose is to protect dependent persons by holding fiduciaries personally accountable if they make financial decisions that are patently unwise. As long as you familiarize yourself with the basics and apply them appropriately, you will have nothing to worry about.

The most widely accepted definition of the Prudent Investor Standard can be found in the “Uniform Prudent Investor Act". As no summary can replace the original, you should read through the complete text of the Act at least once. Certain aspects of the standard play a particularly important role when assessing settlement alternatives.

At its core, the Prudent Investor Standard says a fiduciary’s primary job is to manage the trade-off between risk and return inherent in all financial and investment decisions. It then goes on to list other circumstances that a fiduciary should consider. Of the elements listed, the following are most relevant to the settlement environment:

• general economic conditions
• the possible effect of inflation or deflation
• the effect of taxation
• the role that each course of action plays in the overall strategy
• the expected total return from income and appreciation of capital
• other resources of the beneficiary
• the need for liquidity, regularity of income, and preservation or appreciation of capital
• the duty to verify facts relevant to your decisions
• the requirement that assets be diversified
• the duty to incur only appropriate and reasonable costs

If these elements seem highly complicated, think again. Each one represents basic financial common sense; they are listed specifically to ensure thoroughness.

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