Uniform Prudent Investor Act

Modern Portfolio Theory Made Law

In 1994, the National Conference of Commissioners on State Laws approved a model state statute incorporating the principles of the Restatement (Third) of Trust, 1992, into the Uniform Prudent Investor Act (UPIA).

You may read the uniform action by clicking here.  State links are listed below.

The 1994 UPIA change trust investment law.  The importance of Modern Portfolio Theory is now law. Some investors focused on “preservation of principal” at all costs and avoided “speculation.” Each investment was considered on its own merits without regard to the portfolio as a whole.

The UPIA stresses determination of an appropriate risk profile, then develop and implement an investment strategy for the portfolio. One must be able to justify the reasonableness of the strategy and the prudence of each investment as it relates thereto.

Major Points:

The standard of prudence applies to the portfolio as a whole rather than to individual investments.  Suitable asset allocation reduces the risk to a portfolio viewed as a whole.

The overall investment strategy should be based upon suitable risk and reward objectives. Objectives vary widely. Suitable asset allocation will be concerned with preserving the real purchasing power and the effects of inflation on that power, a factor that was often ignored under prior law.

No particular investment is inherently prudent or imprudent. The premise of the rule is that investors are better protected by using Modern Portfolio Theory and Asset Allocation Adviser using the Modern Portfolio Theory.

The UPIA is clearly the result of a consensus about the significance of modern portfolio theory and the realization that the law and the markets should have similar views regarding prudent investment practices.

Modern Portfolio theory refers to the process of reducing risk in a portfolio through systematic diversification across asset classes and within a particular asset class. It involves the relationship between risk and reward. It assumes that all investors desire the highest possible returns while bearing the lowest amount of risk, and that the public markets are generally efficient. To increase the return an investor must incur more risk.

A well-diversified portfolio minimizes the risk that a particular investment will not perform well (firm-specific risk) and leaves a portfolio exposed only to market risk. Investors without an efficiently diversified portfolio are exposed to unnecessary risk, which will not be compensated by the market.

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Expense Limit for SUVs — Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

Links to State Legislation

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