Prudent Investor Act

Categories: Banking, Ethics/Morals

See: Prudent Investor Rule.

"Fiduciary." Fun word. A fiduciary is like a trustee: someone you’re trusting with your trust...your treasure trove of assets. The Uniform Prudent Investor Act (UPIA) is a statute of guidelines for fiduciaries, adopted by the American Law Institute’s Third Restatement of the Law of Trusts in 1992. The Uniform Prudent Investor Act was an update to how fiduciaries should be investing trust assets. The old version was called the “Prudent Man Rule,” which is that fiduciaries should invest trust assets like a “prudent man,” as if they were their own assets.

Today’s in-crowd, reflected by the UPIA, believes that the prudent thing to do now is the modern portfolio theory (MPT) and total returns approach to investing. The UPIA supports actions like diversification and balanced, responsible investing. It encourages fiduciaries to always look at the whole, rather than the parts, when dealing with other people’s assets.

See: Modern Portfolio Theory.

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Finance: What are Prudent Investor Rule ...8 Views

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finance a la shmoop what are prudent invest our rule standards via know your

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client rule and unsuitable recommendations well let's start with

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the prudent investor rule standards their standards for what is rational [Man discussing prudent investor rules]

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like those who can't afford to take a ton of risk think little old ladies who

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are retired with just enough money to make it to you know the end well they [Old woman with pocket watch]

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can't afford to take the risk of volatile equities like a small cap fund

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that can whipsaw 30% up and 30% down in any given year no way not acceptable not

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suitable not prudent or what about they're investing in a venture capital

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fund or a private equity fund that takes seven years or more before it normally

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even begins to distribute IPO sales or proceeds so no in seven years that [Woman counting cash]

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little old lady is more likely doing the backstroke 24 by 7 yeah well

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recommending venture capital investments to a little old lady who needs cash [Old lady and little pooch graves]

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liquidity to make payments on her dentures is an unsuitable recommendation

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you can't do that so what's prudent or suitable for her well bonds government

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bonds shaken not stirred maybe a few corporate bonds and maybe a spicy 10 or [old lady's portfolio piechart appears]

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maybe 20% of her portfolio allocated to equities with a lot of safe boring

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dividend yield think companies like AT&T and GE and IBM oil companies a whole lot

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of nice boring math on her way to the grave then what if the client is a [Insurance company man approaches girl with cheque]

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parentless teenager who just inherited a million bucks from mom and dad courtesy

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of the insurance company of the drunk driver who killed them both when they [Police sirens appear]

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cross the double yellow line should that teen be in government bonds no that

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would be unsuitable at least not all in government bonds in fact probably very

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little in government bonds why well for that teen a heaping allocation to a

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small calf equity fund is totally prudent appropriate and smart because [Equity fund growth graph appears]

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that teen likely has decades maybe even half a century before she'll want to

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call or use that money so time will bail her out of the year-to-year short-term

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volatility because over time the market goes up and

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usually a lot let's gaze for a moment on this beautiful S&P 500 stock chart for [Stock chart for S&P 500]

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glassed-in and give her to take century kind of lovely well the basic idea for

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this rule is that the financial advisor has to recommend investments that are [Financial advisor reading piece of paper]

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prudent and appropriate given the client's age health financial needs

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appetite for risk their own career strength likelihood of being abducted by

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aliens etc and a time at which point they'll need to turn their investments [Alien spacecraft hangs over city]

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into cash to pay for stuff well the good financial adviser knows her client and

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there actually is a rule called the know your client rule but you can only know

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them so well before you start you know crossing the lines [Man sleeping and woman lying awake in bed]

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