For many years, the "
Prudent Person Rule" stood as a guide for fiduciary investing. While designed to limit unsuitable investing by third parties, the rule basically placed a higher emphasis on preservation of capital than on income or growth, and looked at each investment to see if it was suitable.
- History:
- In 1994, the Uniform Prudent Investor Act was created as a model law for states to enact.
- It essentially updated the old "prudent investing" standards to take modern portfolio theory into account.
- As a result, fiduciary investors can take advantage of diversification and risk-reward tradeoffs and manage the portfolio as a whole.
Look Out!
While the Uniform Prudent Investor Act permits an IA to include growth investments if they are appropriate to the needs of the client, remember that the client's specific situation is the key factor. Look out for questions that imply that under the act stocks would be appropriate for any client account. |
While the fiduciary role of IAs and IARs is discussed in a previous section, it's important to understand that these concepts must be considered in all dealings with the client - from investment recommendations to choice of trustees (for retirement accounts and other trusts) and investment managers.
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