What is "prudent man rule"

n. (context legal investment English) A standard for the duty of a fiduciary with responsibility over investments.

The Prudent Man Rule is based on common law stemming from the 1830 Massachusetts court formulation, Harvard College v. Amory The prudent man rule directs trustees "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."

Under the Prudent Man Rule, when the governing trust instrument is silent concerning the types of investments permitted, the fiduciary is required to invest trust assets as a " prudent man" would invest his own property with the following factors in mind:

• the needs of beneficiaries;
• the need to preserve the estate (or corpus of the trust); and
• the amount and regularity of income.

The application of these general principles depends on the type of account administered. The Prudent Man Rule continues to be the prevailing statute in a small number of states, in particular with regards to investments permitted by mutually-chartered institutions such as savings banks and insurance companies.