What Does Prudent Man Rule Mean?
The Prudent Man Rule mandates that trustees are obligated to manage investments in the same way that a prudent person would manage their own affairs, using discretion and intelligence. This does not apply to speculation but only to the permanent disposition of funds, taking into account their probable earnings and the safety of the capital to be invested.
The Prudent Man Rule is also known as the Prudent Investor Act.
Insuranceopedia Explains Prudent Man Rule
The Prudent Man Rule is derived from the 1830 Massachusetts court case of Harvard College v. Amory. It is a principle of professional money management. It requires those who have control over another’s assets to acquire investments or manage the funds in such a way that the holdings are only exposed to risks that a reasonably intelligent and cautious person would consider worthwhile. They must, in other words, 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 potentially to recover the losses incurred by overly risky investment and management strategies.