Fiduciary Financial Advice to Retirement Savers: Don't Overlook the Prudent Investor Rule
Harvard John M. Olin Center for Law, Economics, and Business, Discussion Paper No. 867, 2016
14 Pages Posted: 15 Jun 2016 Last revised: 13 Dec 2016
Date Written: June 13, 2016
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.
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: Suggested Citation