I am a little confused on Prudent Investor (PIR) and Prudent Man/Person rule (PPR/PMR) Question one : Prudent expert rule is PIR or PMR?? Question two: Is this interpretation correct For Individual IPS - PIR applies For DB/Foundations/LIC/Banks - PPR applies as per CFAI text , Schweser says PIR applies to all except LIC at one place but differs at other places Can someone help clarify?
bump this to lvl 2
Prudent Man Rule = Out of date, not really used anymore except in a minority of states, “trustee should invest as a prudent man would”, excludes some investments because they are too risky. Prudent Investor Rule = Current standard, “trustee should invest as a prudent investor would”, allows all asset classes because diversification can lower overall risk tolerance. Prudent Person Rule = Prudent Man Rule ----------------------------------------------- Prudent Person Rule For more than 150 years, the prudent person rule served as the basis for the investment duties of the trustees of private trusts. The prudent person rule originally appeared in Harvard College v. Amory. According to Harvard College, trustees should “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.” In making investments of trust funds the trustee is under a duty to the beneficiary (a) in the absence of provisions in the terms of the trust or of a statute otherwise providing, to make such investments and only such investments as a prudent man would make of his own property having in view the preservation of the estate and the amount and regularity of the income to be derived; (b) in the absence of provisions in the terms of the trust, to conform to the statutes, if any, governing investments by trustees; © to conform to the terms of the trust, except as stated in 165-168.8 Prudent Investor Rule The ALI replaced the prudent person rule with the prudent investor rule in May 1990. In 1992, the ALI revised the pertinent portion of the Restatement (Second) of Trusts by publishing the Restatement (Third) of Trusts (Prudent Investor Rule).9 Section 227 of the Restatement (Third) of Trusts provides that: The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust. (a) This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.
Now I think the distinction that can be asked about is between prudent investo vs prudent expert - i know that prudent expert definitiely applies under erisa for pensions (it is a higher standard which presumed financial expertise) - i think prudent investor applies the the rest (certainly to foundations and endowments not certain for insurance/banks but i think for these as well) - departed from former prudent man primarily by allowing for diversification across all asset classes as “prudent” Cant be too prudent in this scary world !
plus the prudent investor - applies in the case in which the manager invests for the benefit of the company (insurance, foundation etc) In the case of the prudent expert - the duty is shifted from duty to the pension plan/sponsor to duty to the beneficiaries. That is why there is a high fiduciary duty, as the manager would have to represent the beneficiaries interests
Thanks a lot guys… i guess either CFAI text has some typo or since only new PIR is effective they use it interchangably