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Prudent Man Rule

Definition - What does Prudent Man Rule mean?

The prudent man rule arises out of the idea that a person who invests money on behalf of another should only invest in those things which a prudent person would do; that is, looking after both the capital invested and the income derived from the investment. This is a long standing rule that is derived from a court case in 1830 where an investor lost money through the imprudent investments made on their behalf by a person advertising themselves as someone with knowledge in the subject. This law is mainly directed towards trustees and financial advisors.

Justipedia explains Prudent Man Rule

The idea behind the prudent man rule is that care, discretion, and intelligence need to be used at all times when representing another person's best interests in a financial transaction. This helps prohibit the trustee or financial advisor from improperly allocating the funds they were entrusted with.

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