Legal Definitions - prudent person rule

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.