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''The Uniform Prudent Investor Act'' (UPIA), which was adopted in 1992 by the
American Law Institute The American Law Institute (ALI) is a research and advocacy group of judges, lawyers, and legal scholars established in 1923 to promote the clarification and simplification of United States common law and its adaptation to changing social needs ...
's Third Restatement of the Law of Trusts ("Restatement of Trust 3d"), reflects a "
modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificat ...
" and "
total return The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. ...
" approach to the exercise of fiduciary investment discretion.


Approach

This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary's performance is measured on the performance of the entire portfolio, rather than individual investments.


Adoption

As of May 2004, the ''Uniform Prudent Investor Act'' has been adopted in 44 States and the
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. Other states may have adopted parts of the Act, but not the entire Act. According to the National Conference of Commissioners on Uniform State Laws, the most common portion of the Act excluded by states concerns the delegation of investment decisions to qualified and supervised agents.


Comparison to Prudent Man Rule

''The Uniform Prudent Investor Act'' differs from the Prudent Man Rule in four major ways: #A trust account's entire investment portfolio is considered when determining the prudence of an individual investment. Under the Prudent Investor Act standard, a fiduciary would not be held liable for individual investment losses, so long as the investment, at the time of acquisition, is consistent with the overall portfolio objectives of the account. #
Diversification Diversification may refer to: Biology and agriculture * Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes * Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
is explicitly required as a duty for prudent fiduciary investing. #No category or type of investment is deemed inherently imprudent. Instead, suitability to the trust account's purposes and beneficiaries' needs is considered the determinant. As a result, junior lien loans, investments in limited partnerships, derivatives, futures, and similar investment vehicles, are not per se considered imprudent. However, while the fiduciary is now permitted, even encouraged, to develop greater flexibility in overall portfolio management, speculation and outright risk taking is not sanctioned by the rule either, and they remain subject to criticism and possible liability. #A fiduciary is permitted to delegate investment management and other functions to third parties.


Not adopted by...

As of 2021 the states which have not adopted the ''Uniform Prudent Investor Act'' or Substantially Similar include: *Delaware, and *Louisiana.


Suitability

In enacting the ''Uniform Prudent Investor Act'', states should have repealed legal list statutes, which specified permissible investments types. (However, guardianship and conservatorship accounts generally remain limited by specific state law.) In those states which adopted part or all of the Uniform Prudent Investor Act, investments must be chosen based on their suitability for each account's beneficiaries or, as appropriate, the customer. Although specific criteria for determining "suitability" do not exist, it is generally acknowledged, that the following items should be considered as they pertain to account beneficiaries: * financial situation; * current investment portfolio; * need for income; * tax status and bracket; * investment objective; and * risk tolerance.


References


FDIC Trust ManualPrudent Investor and TOLI: Part 1 - The Prudent Investor Act, Modern Portfolio Theory & Trust-Owned Life Insurance (TOLI)Prudent Investor and TOLI: Part 2 - Factors Determining TOLI Pricing, Performance & SuitabilityPrudent Investor and TOLI: Part 3 - Establishing a Basis for ILIT Compliance (and Best-Practices)


External links


Uniform Prudent Investor Act - Final

List of States that have adopted UPIA UPIA Fiduciary Consulting - Regent CrownUPIA Fiduciary Tools for Trust-Owned Life Insurance (TOLI) - VeralyticConsumer Complaints Inquiries - Trust Administration
Financial regulation in the United States Uniform Acts