Prudent Investment

DEFINITION of 'Prudent Investment'

Generally, any use of financial assets that is suitable for the risk and return profile and the time horizon of a given investor. Fiduciaries (such as financial advisors, attorneys, CPAs and retirement plan sponsors) who are entrusted with making prudent investments should also ensure that an investment is one that makes sense within the investor's overall portfolio and whose fees will not detract significantly from the investment's returns. A good fiduciary will monitor the performance of the investments he has chosen for his clients to make sure they are achieving their stated goals.

BREAKING DOWN 'Prudent Investment'

The Prudent Investor Rule only holds that fiduciaries must make sound money-management decisions for their clients based on the information available. The outcome of their investment decision, whether good or bad, is not a factor in whether the investment is considered prudent.


For example, if a financial planner told his 70-year old client to invest all of his money in a single stock, this would not be considered a prudent investment, even if the stock skyrocketed in value and the investor sold at just the right time to make a huge profit. This investment would be considered imprudent because putting all of one's money into a single stock is an exceptionally risky strategy, especially for someone of retirement age.

RELATED TERMS
  1. Prudent Investor Rule

    A guideline that requires a fiduciary to invest trust assets ...
  2. Prudent Investor Act

    A U.S. law that sets the standard of fiduciary duty for those ...
  3. Fiduciary Rule

    Fiduciary rule is regulation that requires retirement advisors ...
  4. Prudent Expert Act

    A measure contained in section 404(a)(1)(B) of the Employee Retirement ...
  5. Fiduciary Fraud

    Illegal practices committed by financial institutions and financial ...
  6. Named Fiduciary

    The fiduciary that holds responsibility over a given financial ...
Related Articles
  1. Professionals

    Meeting Your Fiduciary Responsibility

    Being a fiduciary comes with a certain level of responsibility. These four steps will reduce your liability when managing other people's money.
  2. Retirement

    5 Ways to Limit Your Fiduciary Liability

    Learn the best practices plan sponsors can use to limit their fiduciary liabilities while improving their plan's overall effectiveness.
  3. Professionals

    Fiduciary Designations For Financial Advisors

    Attaining the AIF or AIFA could help both you and your clients enjoy a comfortable retirement.
  4. Investing Basics

    Why the Fiduciary Rule is Good for All Investors

    The new fiduciary standard should help lower what middle- and lower-income investors pay, on average, to brokers for retirement planning advice.
  5. Your Practice

    Fiduciary Rule Impact: How it's Already Being Felt

    The fiduciary rule will be announced today but it's impact is already being felt. Here's how.
  6. Investing News

    How the New Fiduciary Rule Will Impact Investors

    The DOL's new fiduciary rule is now in effect. Here are a few areas where individual investors, including clients and prospects, might notice some change.
  7. Professionals

    An Introduction To Fiduciary Advisors

    Offering personalized solutions in a world of cookie-cutter advice may be your ticket to career perfection.
  8. Your Practice

    Why Fiduciary Rule is Good News for Small Plans

    Under the new fiduciary rule small business owners may be subject to less risk for the plans that they sponsor. Here's why.
  9. Retirement

    Retirees: Don’t Lose Your Fiduciary Rule Protection

    Retired? The Department of Labor’s proposed fiduciary rule may affect the management of your tax-advantaged retirement accounts. Here’s the lowdown.
  10. Retirement

    Should You Change Your Retirement Portfolio?

    The government's new fiduciary rule is a reason to look hard at your retirement savings and consider replacing those that wouldn't pass muster now.
RELATED FAQS
  1. Why do financial advisors have a fiduciary responsibility?

    Find out why financial advisors have a fiduciary duty to their clients, including what fiduciary duty entails and an example ... Read Answer >>
  2. Why is fiduciary duty so important?

    Find out why fiduciary duty is so important, including what this legal obligation entails and an example of how it can affect ... Read Answer >>
  3. What is fiduciary liability insurance, and what are its benefits?

    Understand what fiduciary liability insurance is, what companies or individuals can benefit from having it, and when it is ... Read Answer >>
  4. What is a fiduciary deed and when is it useful?

    Understand what a fiduciary deed is and under what circumstances it should be used. Learn about the principles behind its ... Read Answer >>
  5. What are some examples of fiduciary duty?

    Understand what it means to be a fiduciary, under what circumstances fiduciary duties arise and some common examples of fiduciary ... Read Answer >>
  6. How quickly should my financial advisor sell a stock that I have asked him or her ...

    Financial advisors and planners have fiduciary responsibilities to their investors. They owe their investors a high degree ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center