DEFINITION of 'Uniform Prudent Investor Act - UPIA'

The Uniform Prudent Investor Act is a uniform statute that sets out guidelines for trustees to follow when investing trust assets. It is an update to the previous prudent man standards intended to reflect the changes that have occurred in investment practice since the late 1960s. Specifically, the Uniform Prudent Investor Act reflects a “modern portfolio theory” and “total return” approach to the exercise of fiduciary investment discretion.

BREAKING DOWN 'Uniform Prudent Investor Act - UPIA'

The Uniform Prudent Investor Act was adopted in 1992 by the American Law Institute’s Third Restatement of the Law of Trusts. It was an update to the previously accepted Prudent Man Rule. By taking the total portfolio approach and eliminating category restrictions on different types of investments, the Uniform Prudent Investor Act fostered a greater degree of diversification in investment portfolios. It also made it possible for trustees to include in their portfolios investments such as derivatives, commodities and futures. While these investments individually have a relatively higher degree of risk, they could theoretically reduce overall portfolio risk and boost returns when considered in a total portfolio context.

The Prudent Man Rule

The Prudent Man Rule was based on Massachusetts common law written in 1830 and revised in 1959. It stated that a trust fiduciary was required to invest trust assets as a “prudent man” would invest his own assets, with the following in mind:

  • The needs of beneficiaries
  • The need to preserve the estate
  • The need for income

The Uniform Prudent Investor Act’s Updates to the Rule

The Uniform Prudent Investor Act made four main changes to the previous Prudent Man Rule standard:

  • A trust account's entire investment portfolio is considered when determining the prudence of an individual investment. Under the Uniform Prudent Investor Act standard, a fiduciary would not be held liable for individual investment losses so long as the investment was consistent with the overall portfolio objectives.
  • Diversification is explicitly required as a duty for prudent fiduciary investing.
  • No category or type of investment is deemed inherently imprudent. Instead, suitability to the portfolio's needs is considered. As a result, investment junior lien loans, investments in limited partnerships, derivatives, futures and similar investment vehicles is now possible. However, speculation and outright risk taking is not sanctioned by the rule and remain subject to possible liability.
  • A fiduciary is permitted to delegate investment management and other functions to third parties.

The Uniform Prudent Investor Act’s most important change was that the standard of prudence would henceforth be applied to any investment in the context of the total portfolio, rather than to individual investments.

RELATED TERMS
  1. Prudent Investment

    A prudent investment refers to the use of financial assets that ...
  2. Uniform Partnership Act (UPA)

    The Uniform Partnership Act (UPA) provides governance for business ...
  3. Fiduciary

    A fiduciary is a person who acts on behalf of another person, ...
  4. Uniform Simultaneous Death Act ...

    When the deaths of spouses occur at nearly the same time, the ...
  5. Account In Trust

    An account in trust is a type of financial account opened by ...
  6. Active Trust

    An active trust is a trust in which the trustee is required to ...
Related Articles
  1. Financial Advisor

    Identifying a Breach of Fiduciary Duty

    Pension fund managers are not the only entities owing a fiduciary duty to stockholders. Corporate officers and directors have key fiduciary roles.
  2. Financial Advisor

    Fiduciary Designations For Financial Advisors

    Attaining the AIF or AIFA could help both you and your clients enjoy a comfortable retirement.
  3. Retirement

    Employer Responsibility For Pension Plans

    Here is a look at the role employers play in 401(k) plans.
  4. Financial Advisor

    Succeeding At The Series 63 Exam

    Your career as a securities agent begins with this test. We'll show you how to score high.
  5. Personal Finance

    How Fiduciary and Suitability Standards Differ

    There are big differences between how advisors and brokers qualify investments for clients.
  6. Personal Finance

    If An Advisor Is a Fiduciary, What Does It Mean?

    This is what it means when an advisor acts as a true fiduciary and why it matters.
  7. Financial Advisor

    The Fiduciary Rule and Life Insurance: Use Caution

    The rules pertaining to life insurance under the DOL's fiduciary rule remain murky.
  8. Financial Advisor

    How Advisors Can Best Prepare for Fiduciary Rule

    Financial advisory firms should take a proactive approach to getting personnel ready to comply with the new fiduciary rules.
  9. Personal Finance

    What Is a Fiduciary and Why Does It Matter?

    Not all financial advisers have your best interests at heart. Here's why fiduciary duty is key to building a mutually beneficial adviser-client relationship.
  10. Financial Advisor

    How SEC and DOL Fiduciary Standards Could Differ

    SEC fiduciary standards could differ from what the DOL has proposed, causing more confusion about the impact of the rule.
RELATED FAQS
  1. What are some examples of fiduciary duty?

    Understand what it means to be a fiduciary, when fiduciary duties arise. Learn some common examples of fiduciary duty in ... Read Answer >>
Trading Center