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Beneficiary Investments

Beneficiary Investments

The Prudent Investor:

What’s Your Plan?

Invest as a prudent investor would; not as you personally want or how you think you should invest.

Everyone knows that a trustee must be “prudent”.

Few, however, seem to really comprehend what this means.

Truth be told, you could write an entire book on how trustees should invest. Until then, this chapter will focus on the broad highlights of investing trust assets with a few examples thrown in, which appear to be recurring problems.

The Prudent Investor Rule

The term “prudent man rule” comes from an 1830 Massachusetts case by the name of Harvard College and Massachusetts General Hospital v. Amory. This case enunciates the standard of conduct of one who invests funds for another. As the court explained: “All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

Over time, the prudent “man” rule has become the prudent “investor” rule and the concepts found in the Amory case have served as the starting point for fiduciary investing and is now, along with Modern Portfolio Theory, the backbone for individual states’ prudent investor statutes.

What we take away from the Amory case is that the courts, indeed the law, place a great burden and responsibility on those who invest assets for another. The law is exacting in its scrutiny of your conduct as trustee. The law presumes – indeed demands – that you will be prudent. The law does not expect you to be Warren Buffet, or some Wall Street whiz, but it does demand that you will bring to the table a reasonable amount of attention, diligence, concern, and yes, even skill. If you don’t have those traits, you need to hire someone who does or you need to resign. You cannot invest a trust’s funds haphazardly. You need to have a plan or strategy.

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