9.3.4 Prudent Investor Standards
Recall that fiduciary accounts include investment adviser accounts, UGMA/UTMA accounts, estate accounts, and trust accounts. For each of these accounts, the adviser, custodian, executor, or trustee must act as a fiduciary toward the accountholder or beneficiary. Because ERISA-approved retirement plans are usually set up as trust agreements, the trustee overseeing the plan is also considered to be a fiduciary. Acting as a fiduciary requires putting the other party’s interests before your own. From a financial perspective, this also means investing the beneficiary’s assets in a prudent manner.
Modern prudent investor standards are based on an older rule known as “the prudent man” rule. Under this rule, professionals acted as fiduciaries (trusted advisers) and were expected to show the same level of care for others’ portfolios as they, or any other prudent person, would for their own. In other words, they should not subject their clients’ portfolios to any more risk than the average, cautious investor would take.
Over the years, the relatively simple requirement for professionals to compare themselves to a prudent person has been spelled out and expanded into what is now called the Prudent Investor Rule. The Prudent Investor Rule recognizes that the most cautious investment may not always be the most prudent investment because making prudent investing decisions includes making money a