Investment Strategy

Fiduciary investments need to be based on four principals:

1. The Fiduciary Relationship  

2. The Fiduciary Standard

3. Compliance with the Uniform Prudent Investor Act 

4. A clear understanding and utilization of Modern Portfolio Theory     

The Fiduciary Relationship

Fiduciaries are responsible for someone else's welfare. To meet this responsibility, it is essential that the fiduciary carefully and correctly assess the client's situation. They need to assess the client's capabilities, wants, desires, needs, abilities, limitations, etc. From this assessment the fiduciary must strategize, create and implement the best possible plan of support, while remaining diligent to the statutes that direct fiduciaries, while protecting and serving their clients.  

The Fiduciary Standard

The typical investor is answerable only to himself. If he speculates and loses, he's the only one hurt. By contrast, a fiduciary has accepted responsibility for someone else's welfare. If he speculates and loses, his client suffers the consequences of his imprudence. Thus, California law imposes the fiduciary standard upon all fiduciaries (public, private, or professional). That standard requires a fiduciary to act solely in the client's best interest. 

Uniform Prudent Investor Act

(UPIA) - Was adopted in 1992. It reflects a "modern portfolio theory" and "total return" approach to the exercise of fiduciary investment discretion.  Guardians and conservators are subject to laws of trust established in Probate Code Sec 2101, however, they are also limited in Probate Code Sec 2574 as to what investments can be made without Court approval. Trustees are subject to the laws of trust established in Probate Code Sec 2101, without the limitation of Sec 2574.

  • A trust's, or estate's entire portfolio is considered in evaluating the prudence of individual investments. The fiduciary is not liable for individual investment losses, so long as the investment, at the time it was made, was consistent with the overall portfolio objectives. 
  • Diversification is required to avoid risk of market sector failure. No category or type of investment is, of it's self, imprudent. However the key is the fit of that investment to overall investment strategy. The fit to the trust's (or estate's) purposes and beneficiaries' needs is considered the key. The fiduciary is now permitted greater flexibility in portfolio management. However,  because speculation and outright risk taking is not sanctioned by the rule, the fiduciary remain subject to criticism and liability if he goes too far. 
  • The fiduciary is permitted to delegate investment management to third parties.  

Modern Portfolio Theory

Uniform Prudent Investor Act (UPIA) admonishes fiduciaries to embrace the principals of Modern Portfolio Theory.