The Dynamics of the Prudent Investor Rule and the Impact on Fiduciaries in the Oakland County Probate Court

by James P. Lampertius

The rules of fiduciary conduct involving investment strategies have evolved, especially in the last ten years. In addition, various levels of sophisticated investment products and strategies have become more accessible to the public, whether they are college savings 529 plans, annuities, mutual funds or real estate investments. Courts are increasingly requested to assist with special requests of the fiduciary for asset management and investments.

A method of accountability for such special investment decisions is often necessary. Deciding the relevant factors and information to adjudicate the request can be complex at best. It is hoped that this discussion will highlight essential steps for the Court to use in assessing requests for investing under Minors Conservatorships, balancing of interests in Trusts and dealing with undiversified positions in Adult Conservatorships.

Effective April 2000, Michigan adopted the Prudent Investor Rule with the Estates and Protected Individuals Code as part of a national trend with the Uniform Prudent Investor Act. The Prudent Investor Rule modernized old laws that failed to keep up with the changing world of investments, especially the standard of conduct called modern portfolio theory.

The investment process under the Prudent Investor Rule is based on modern portfolio theory, which considers the total return of investment assets (not investments in isolation) and risk tolerance (not merely risk avoidance). The fiduciary’s standards of conduct – duty to exercise reasonable care, skill and caution – boil down to two main processes under modern portfolio theory:

  • Sound diversification and
  • Properly assessing risk and return.

Key then to fiduciary compliance with the Prudent Investor Rule is an ONGOING PROCESS OF ASSESSMENT, involving communication of expectations and needs, assessment of risk/return in light of those needs and DOCUMENTING the process.

 

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