Financial Advisers Can't Overlook the Prudent Investor Rule

4 Pages Posted: 9 Aug 2016 Last revised: 5 Apr 2017

See all articles by Max M. Schanzenbach

Max M. Schanzenbach

Northwestern University - Pritzker School of Law

Robert H. Sitkoff

Harvard University - Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: August 1, 2016

Abstract

This article calls attention to the Department of Labor’s imposition of the “prudent investor rule” on financial advisers to retirement savers. The article also canvasses the customary role of an investment policy statement in promoting compliance with the prudent investor rule by professional fiduciaries.

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 was necessary to protect retirement savers from conflicted investment advice. But in addition to a duty of loyalty, ERISA fiduciary status also imposes a duty of care or prudence. And with respect to investment management, the fiduciary standard of care is governed by the “prudent investor rule.” The basic tenets of the prudent investor rule are grounded in modern portfolio theory. In short, the prudent investor rule requires diversification and an overall investment strategy having risk and return objectives reasonably suited to the purpose of the investment account.

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

Suggested Citation

Schanzenbach, Max Matthew and Sitkoff, Robert H., Financial Advisers Can't Overlook the Prudent Investor Rule (August 1, 2016). Journal of Financial Planning (August 2016), Northwestern Law & Econ Research Paper No. 16-14, Harvard Public Law Working Paper No. 17-01, Available at SSRN: https://ssrn.com/abstract=2817191

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 University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://https://hls.harvard.edu/faculty/directory/10813/Sitkoff

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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