When advising trust clients, FINRA member firms have a duty to ensure that the investment recommendations they make are suitable in light of “the trust’s investment objectives, time horizon, and risk tolerance.” (FINRA NTM 12-25) (emphasis added). The suitability analysis is informed, in part, by the trustee’s underlying duty to comply with applicable “Prudent Investor” laws, which have been enacted in almost every State. Most of these laws embrace modern portfolio theory and principles of diversification.
Michigan’s Prudent Investor Rule, codified at MCL 700.1501, et seq., is based on the Restatement (Third) of Trusts, which states that, in order to be prudent, an investment of the trust corpus must be consistent with “the purposes, terms, distribution requirements, and other circumstances of the trust.” 79 Mich. B.J. 336.  Michigan’s Rule also imposes a portfolio standard of care that requires investment across a broad range of asset classes, economic sectors, and constituent securities. MCL 700.1504.
In addition to diversification, most Prudent Investor statutes require that the portfolio be constructed out of securities that offer the lowest cost for a particular level of expected return. Third Restatement § 90 cmt. f(1), at 308; see id. § 88 cmt. a, at 256 (trustee has “a duty to be cost-conscious”). In other words, “wasting beneficiaries’ money is imprudent.” Uniform Prudent Investor Act § 7 & cmt.
If you are a trustee and concerned that the trust’s broker may have recommended unsuitable investments, Mika Meyers, PLC may be able to assist you. Contact investor rights attorney Daniel J. Broxup for a free, no-obligation consultation.
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