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Series 7 practice questionhardFiduciary Accounts — Prudent Investor Rule

Under the Prudent Investor Rule, a fiduciary managing a trust portfolio is expected to:

  1. AInvest only in U.S. Treasury securities to eliminate all risk
  2. BEvaluate the suitability of investments in the context of the overall portfolio and the trust's purposes, considering diversification and risk/return objectives✓ Correct answer
  3. CMaximize short-term returns regardless of risk
  4. DAvoid all equity investments since stocks are inherently speculative
Explanation

Why B — Evaluate the suitability of investments in the context of the overall portfolio and the trust's purposes, considering diversification and risk/return objectives

The Prudent Investor Rule (adopted from the Uniform Prudent Investor Act) requires fiduciaries to manage trust assets as a prudent investor would, considering the portfolio as a whole rather than evaluating each investment in isolation. The fiduciary must consider diversification, the trust's purposes, risk and return objectives, and the beneficiaries' needs. Unlike the older Prudent Man Rule, the Prudent Investor Rule does not categorically prohibit any type of investment.

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