Prudent Investor Rule

The prudent investor rule requires a fiduciary to:

1. A.Manage with care, skill, and diversification at the portfolio levelCorrect - modern prudent investor standard.
2. B.Guarantee returnsNo fiduciary may guarantee investment results, and promising them would itself be a violation. The standard governs the quality of the decision-making process, not the outcome it produces.
3. C.Judge each holding in isolationThis is the older prudent man rule, which examined each investment on its own and effectively barred anything speculative. The modern prudent investor standard replaced it precisely so a risky holding can be judged by its contribution to the total portfolio.
4. D.Avoid all volatile assetsAvoiding all volatility would itself breach the duty, since a portfolio with no growth assets exposes the beneficiary to inflation risk. Volatile assets are permitted when they fit the portfolio's objectives and risk level.

Why: The prudent investor standard requires care, skill, and diversification, judged at the portfolio level.

Under the prudent investor standard, an adviser evaluates risk:

1. A.For each security in isolationThis is the older prudent man approach the prudent investor standard replaced. Judging each holding on its own would condemn a volatile security that actually reduces overall portfolio risk through low correlation, which is precisely the reasoning the modern standard adopts.
2. B.By avoiding all riskEliminating risk is neither possible nor prudent, since cash carries inflation risk and guarantees no growth. The standard calls for risk appropriate to the portfolio's objectives, managed through diversification, not risk driven to zero.
3. C.At the total-portfolio level, with diversificationCorrect - portfolio-level prudence.
4. D.Only at year-endThe prudent investor standard describes how risk is measured, across the whole portfolio, not when the measurement happens. Oversight is ongoing, and an annual snapshot would miss the drift and concentration that build up between reviews.

Why: Risk is judged at the total-portfolio level, with diversification, rather than security by security.

Under the prudent investor rule, a fiduciary may:

1. A.Never delegate anythingThis is the older, stricter view that the prudent investor rule deliberately abandoned. Modern law permits delegation to a professional manager, on condition that the fiduciary selects the delegate carefully, sets the terms sensibly, and monitors performance.
2. B.Ignore diversificationDiversification is a central expectation under the rule, not something a fiduciary is free to disregard. It may be set aside only in narrow circumstances where the fiduciary reasonably determines the purposes of the trust are better served without it.
3. C.Guarantee returnsNo fiduciary can promise investment outcomes, and the prudent investor rule judges the process rather than the result. A fiduciary who followed a sound process is not liable merely because the market fell, and one who guaranteed returns would be exposed regardless.
4. D.Delegate investment functions with reasonable care and oversightCorrect - prudent delegation is allowed.

Why: A fiduciary may delegate investment functions if done with reasonable care, skill, and oversight.

The Ferrand Family Trust names Oriel Ferrand and Hesketh Vane as co-trustees. The trust instrument is silent on how the trustees are to act. Oriel telephones the agent at Carrowmore Securities and directs the sale of $200,000 of the trust's bond holdings, adding that Hesketh is travelling and will "sign off later." The agent should:

1. A.decline to execute until both co-trustees have authorised the sale, because a trust instrument silent on the point requires the co-trustees to act jointlyCorrect. Co-trustees must act together unless the trust instrument authorises them to act separately.
2. B.execute the order, because any trustee has full authority to act for the trust unless the instrument expressly says otherwiseThe default runs the other way. Silence means joint action, not unilateral authority.
3. C.execute the order and obtain Hesketh's written ratification within ten business daysThere is no ratification window for trust orders. The authority must exist when the order is given.
4. D.execute the order if the proceeds are left in cash in the trust account rather than reinvestedLeaving proceeds in cash does not supply the missing authority to sell.

Why: The trust instrument is the source and the limit of a trustee's authority over the account. Where two co-trustees are named and the document says nothing about acting separately, they must act jointly, so an order from one of them is not an order of the trust. The right course is to obtain the concurrence of both trustees before executing. Retroactive ratification is not a substitute: if the market moves against the trust in the meantime, the firm has executed an order no one with authority gave.