UPDATE 1.28.25: Now, as always, it’s important to exercise prudence. For a reminder about the Prudent Man Rule and its inception, read Steve Lydenberg, Founding Director of the Initiative for Responsible Investment at the Kennedy School of Government at Harvard University, who wrote in Reason, Rationality, and Fiduciary Duty, in 2012:
The courts and regulators in the United States have applied the language of reasonableness to financial matters and fiduciary issues over the years. In the
seminal Harvard College v. Amory ruling on the duties of fiduciaries in 1830, the courts instructed trustees “to 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.” 5Trustees are instructed to observe the prudent behavior of others and to distinguish speculation, which runs contrary to the fiduciary duty of care, from “the
permanent disposition” of funds—that is, something akin to what we might call today long-term investments or preservation of capital.
UPDATE 8.30.24: The ideas of fiduciary duty and the Prudent Man are linked. Are you working with a fiduciary? That’s a question Your Survival Guy encourages you to ask your financial adviser. The answer could mean a lot to your future. The Department of Labor defines the responsibilities of a fiduciary as follows (my emphasis added in bold):
The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses. In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA. They also must avoid conflicts of interest. In other words, they may not engage in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.
In the September 2015 issue of Richard C. Young’s Intelligence Report, Dick Young wrote:
The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court formulation Harvard College v. Amory. The Prudent Man Rule directs trustees “to 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 invested.”
Since I started our family investment management firm in 1989, I have operated under the assumption that the Prudent Man Rule to this day carries as much weight as it did in 1830. Common sense and prudence just don’t go out of style—ever.
Originally posted September 29, 2015.
