PRUDENT INVESTOR RULE

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By Kristin Hovencamp

Kristin Hovencamp is an Investment Executive and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC.

The Uniformed Prudent Investor Act of 1994 is a standard that sets out guidelines for financial professionals to follow when investing assets on behalf of clients. Originally written as the prudent investor (man) rule, it prevents a fiduciary from taking unnecessary risks with their clients’ funds. According to an 1830 Massachusetts Supreme Court opinion, when one person is given control over another’s assets, they must make investment decisions that a person of prudence, discretion, and reasonable intelligence could be expected to make.

A fiduciary following the prudent investor rule would consider the following:

Diversifying assets to reduce as much risk as possible. The rule is guided by modern portfolio theory and total return approach to investing. Modern portfolio theory is a method for constructing a portfolio of assets such that the expected return is maximized for a given level of risk.

Individual assets must be evaluated not in isolation but as part of the total portfolio and an overall investment strategy with risk and return objectives that are reasonably suited to the client.

Invest and manage assets with reasonable care, skill, and caution. For example, a fiduciary must consider tax consequences and distribution requirements and maintain enough liquidity to fund cash flow needs to avoid being forced to sell when prices have dropped.

All categories or types of investments and invest in anything that plays an appropriate role in achieving risk and return objectives. Is the asset suitable for the client? How would an asset behave in each economic condition or a period of inflation or deflation?

The trade-off in all investments between risk and return. A fiduciary must regularly monitor investments for fundamental changes in the nature or risks of the holdings.

The Uniformed Prudent Investor Act emphasizes a fiduciary’s role in making suitable asset recommendations in the best interest of the client, and from a total portfolio context.

Kristin Hovencamp is an Investment Executive at RJFS, and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, which is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors. Past performance may not be indicative of future results. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605. HazlettWealthManagement.com

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