Prudent investing of trust assets

In 1994 the Uniform Prudent Investor Act (UPIA) was promulgated, and has since been adopted in 49 states. UPIA includes an explicit duty to diversify trust assets, and provides that a “trustee’s investment and management decisions respecting individual assets are evaluated not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”

UPIA applied to existing trusts as well as trusts created after its adoption. If prior law constrained professional fiduciaries and encouraged overly conservative investments, the change in law could have led to a shift in investment strategies as the constraints were removed. Is that what happened?

That’s the question that law professors Max M. Schanzenbach and Robert H. Sitkoff examined in “Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?” (December 2005,).

Study results

The professors crunched data from the Federal Financial Institutions Research Council and the FDIC for the period from 1986-1997, so investment practices from before and after UPIA adoption are represented. These reports break down trust holdings into ten categories. One of these categories includes stocks and mutual fund shares. Following exhaustive statistical analysis, the professors concluded that:

• After a state adopted UPIA, the gross stock investments of trusts increased by from 1.5% to 4.5%, compared to states that had not yet reformed their law.

• Before reform, stock investments averaged 41% of trust assets, and after reform the share rose to 47%.

• During the period studied there was also a strong shift toward stocks independent of the adoption of UPIA, an increase of from 10 to 17 percentage points. This may be attributable in part to the bull market during the study period.