Uniform Prudent Investor Act (UPIA)

What Is the Uniform Prudent Investor Act (UPIA)?

The Uniform Prudent Investor Act (UPIA) is a standard that sets out guidelines for trustees to follow when investing trust assets on behalf of a trustor. It also applies to financial professionals who make recommendations or place trades on behalf of clients. It is an update to the former "Prudent Man" standard intended to reflect the changes that have occurred in investment practice since the late 1960s.

Specifically, the Uniform Prudent Investor Act adopts a modern portfolio theory (MPT) and total return approach to the exercise of fiduciary investment and discretion.

Understanding the Uniform Prudent Investor Act (UPIA)

The Uniform Prudent Investor Act was adopted in 1992 by the American Law Institute’s Third Restatement of the Law of Trusts. It was an update to the previously accepted Prudent Man Rule.

By taking the total portfolio approach and eliminating category restrictions on different types of investments, the Uniform Prudent Investor Act fostered a greater degree of diversification in investment portfolios. It also made it possible for trustees to include in their portfolios investments such as derivatives, commodities, and futures. While these investments individually have a relatively higher degree of risk, they could theoretically reduce overall portfolio risk and boost returns when considered in a total portfolio context.

The Prudent Man Rule

The Prudent Man Rule was based on Massachusetts common law written in 1830 and revised in 1959. It stated that a trust fiduciary was required to invest trust assets as a “prudent man” would invest his own assets, with the following in mind:

A prudent investment will not always turn out to be a highly profitable investment; in addition, no one can predict with certainty what will happen with any investment decision.

More recently, the prudent man rule has been renamed the prudent person rule. This set of guidelines can also be applied outside of trustee domains, where it is referred to as the prudent investor rule.

The Uniform Prudent Investor Act’s Updates to the Rule

The Uniform Prudent Investor Act made four main changes to the previous Prudent Man Rule standard:

The Uniform Prudent Investor Act’s most important change was that the standard of prudence would henceforth be applied to any investment in the context of the total portfolio, rather than to individual investments.