Prudent Man Rule
What Does Prudent Man Rule Mean?
The Prudent Man Rule requires trustees to manage investments with the same discretion and intelligence that a prudent person would use when managing their own affairs. It applies only to the permanent management of funds, considering both the probable earnings and the safety of the invested capital, rather than engaging in speculation.
The Prudent Man Rule is also known as the Prudent Investor Act.
Insuranceopedia Explains Prudent Man Rule
The Prudent Man Rule originates from the 1830 Massachusetts court case Harvard College v. Amory and is a key principle of professional money management. It requires those responsible for managing another’s assets to invest or manage funds in a way that exposes the holdings only to risks a reasonably intelligent and cautious person would deem acceptable. In other words, investments should have a low probability of permanent or long-term loss.
If a fiduciary breaches the Prudent Man Rule, they can be sued for damages and may be held liable for any losses resulting from overly risky investment or management strategies.
