Abstract

https://ssrn.com/abstract=2795037
 


 



Fiduciary Financial Advice to Retirement Savers: Don't Overlook the Prudent Investor Rule


Max M. Schanzenbach


Northwestern University - Pritzker School of Law

Robert H. Sitkoff


Harvard Law School

June 13, 2016

Harvard John M. Olin Center for Law, Economics, and Business, Discussion Paper No. 867, 2016
Northwestern Law & Econ Research Paper No. 16-11
Harvard Public Law Working Paper No. 16-48

Abstract:     
Americans now hold trillions of dollars in individual retirement savings accounts, raising concerns about conflicts of interest among financial advisers who provide advice to retirement savers. Prompted by these concerns, in April 2016 the Department of Labor promulgated a rule that imposes on financial advisers to retirement savers “fiduciary” status under the Employee Retirement Income Security Act. The Department reasoned that the fiduciary duty of loyalty would protect retirement savers from conflicted investment advice. But in addition to a duty of loyalty, fiduciary status also imposes a duty of care. With respect to investment management, the fiduciary standard of care is governed by the “prudent investor rule,” which is grounded in modern portfolio theory and requires an overall investment strategy having risk and return objectives reasonably suited to the purpose of the investment account. This essay calls attention to the regulatory imposition of the prudent investor rule on financial advisers to retirement savers. The essay also canvasses the basic tenets of the prudent investor rule, highlighting its nature as principles-based rather than prescriptive, and the customary role of an investment policy statement in compliance by professional fiduciaries.

Number of Pages in PDF File: 14

Keywords: fiduciary, fiduciary investment, prudent investor rule, Department of Labor, retirement account, pension account, ERISA, best interest, modern portfolio theory, investment policy statement, retirement saver

JEL Classification: G11, J26, K10, K23, K31, G23, H55


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Date posted: June 15, 2016 ; Last revised: December 13, 2016

Suggested Citation

Schanzenbach, Max M. and Sitkoff, Robert H., Fiduciary Financial Advice to Retirement Savers: Don't Overlook the Prudent Investor Rule (June 13, 2016). Harvard John M. Olin Center for Law, Economics, and Business, Discussion Paper No. 867, 2016; Northwestern Law & Econ Research Paper No. 16-11; Harvard Public Law Working Paper No. 16-48. Available at SSRN: https://ssrn.com/abstract=2795037

Contact Information

Max Matthew Schanzenbach
Northwestern University - Pritzker School of Law ( email )
375 E. Chicago Ave
Chicago, IL 60611
United States

Robert H. Sitkoff (Contact Author)
Harvard Law School ( email )
1575 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 384-8386 (Phone)
(617) 812-6195 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/directory/facdir.php?id=649

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