ACTEC Law Journal


Trustees, like all investors, are exposed to a wide-ranging marketplace of investment vehicles, techniques, strategies, and theories. Trustees have a threshold choice to make with respect to the manner in which trust assets are to be invested. Active Management -- historically, a conventional approach -- aims to "beat the market" and surpass benchmark returns by picking and choosing among individual securities based on the trustee's determination that they are mispriced (i.e. undervalued) and/or by timing transactions based on forecasting. Alternatively, trustees may choose to simply invest in and own entire markets, or asset classes, and accept overall market returns by using low cost asset class index funds. This latter approach is known as passive investing, or indexing.

This article traces both the historical development of financial scholarship regarding investment practices and legal scholarship addressing the evolution of fiduciary duties. It then reviews the modern prudent investing rules governing trust investment and explores several major issues: (1) whether a passive approach is encouraged or even required by law, (2) why so few professional trustees seem to be employing passive investment management and (3) whether recent case law focusing on the costs of investing in the context of ERISA plans is a harbinger of similar arguments in the private trust area.

We conclude with a recommendation that a passive investment strategy become the default standard for corporate and professional trustees under modern iterations of the prudent investor rule.



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