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Simple English definitions for legal terms
prudent person rule
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A quick definition of prudent person rule:
The prudent person rule is a guideline that says a person in charge of investing money for someone else can only invest in things that a normal person would invest in. They have to think about how much money they might make and how safe the investment is. This rule comes from a court case called Harvard College v. Amory.
A more thorough explanation:
The prudent-person rule, also known as the prudent investor rule, is a legal principle that requires a fiduciary to invest in securities that a reasonable person would purchase. This is evaluated based on the probable income and probable safety of the investment.
For example, if a financial advisor is managing a client's retirement fund, they must invest in securities that are likely to provide a reasonable return on investment while also minimizing the risk of losing the client's money. The advisor cannot invest in high-risk securities that are unlikely to provide a return or that could result in significant losses.
The prudent-person rule is based on the precedent set in the case of Harvard College v. Amory, which was decided in 1830. In this case, the court ruled that a trustee must act with the same care and prudence that a prudent person would use in managing their own affairs.