Many of us have heard mention of the Prudent Man Rule, but many individuals seem confused about what it means and its applicability. This rule actually had its origin from a 1830 common law ruling in the Commonwealth of Massachusetts. This case involved a controversial expenditure of funds by Harvard University, and the rule came to be the common sense guideline and fiduciary responsibility for trustees of certain types of monies, particularly those invested in trusts, such as in not-for-profit funds. Basically, this guideline called for investing monies as a prudent man would, both in terms of preservation of capital, safety, and cautious growth and protection. Because of this guideline, certain types of investments have long been considered inconsistent with this rule, and thus inappropriate to be used for certain types of situations.
While an individual may determine that for his own personal situation, he could and should take a certain amount of risk, and even speculate if he feels comfortable with it (because after all, it is his own money to risk), trustees of monies such as Foundation money, not for profit organizational funds, public sector monies, etc., should not take that type of risk. This has nothing to do specifically with the underlying company or fund or how well it might perform, but rather the degree of risk.
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Following this reasoning, organizations with monies that should be under the Prudent Man guidelines should avoid certain types of investments, such as speculative stock, naked options, put options, hedge funds (because they are far less regulated that mutual funds), mutual funds specializing in one industry or sector, aggressive funds, speculative funds, commodities, commodity futures or options, etc.
We have heard many reports of all the individuals and organizations that were "swindled" by Bernard Madoff. While anyone taken advantage of in an illegal scheme is terrible, if monies invested with non profits or not for profit organizations, Foundations and Trusts, or public funds, were invested with Madoff, it was not only shameful, but a clear cut violation of the philosophy and intent of the Prudent Man Rule. Even if the Madoff funds were not "scams," they would have been considered a form of hedge fund, and certainly less regulated, and far riskier than should be considered prudent.
It is also not prudent to invest more than a specific limited percentage in a particular industry or market sector, or in any particular stock or bond, no matter how highly rated it might be. These types of monies should always be diversified to "spread" and limit risk to the greatest degree possible.
Organizations, etc., should train their Trustees to understand the meaning, ramifications and applicability of the Prudent Man Rule, and how adhering to these rules should be mandated. The Prudent Man philosophy has been around and a governing philosophy and rule for over 180 years, because it makes sense. Now we must demand that is observed!
The Prudent Man Rule
Richard Brody has over 30 years consultative sales, marketing, training, managerial, and operations experience. He has trained sales and marketing people in numerous industries, given hundreds of seminars, appeared as a company spokesperson on over 200 radio and television programs, and regularly blogs on real estate, politics, economics, management, leadership, negotiations, conferences and conventions, etc. Richard has negotiated, arranged and/ or organized hundreds of conferences and conventions. Richard is a Senior Consultant with RGB Consultation Services, an Ecobroker, a Licensed Buyers Agent (LBA) and Licensed Salesperson in NYS, in real estate. Richard Brody has owned businesses, been a Chief Operating Officer, a Chief Executive Officer, and a Director of Development, as well as a consultant. Richard has a Consulting Website ( http://tinyurl.com/rgbcons ); a blog ( http://tinyurl.com/rgbstake ); and can be followed on Twitter.
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