The Risk/Return Tradeoff is the Theme

Whoever said, “Those who can, do, and those who can’t, teach,” has never been in my wife’s third grade class. Doing elementary math, science, history and the rest of the curriculum is a snap, but teaching it to a prepubescent blob of potentiality is way beyond my pay grade. Heck, I don’t even know how to access the operating system of a third grader’s mind, let alone program it.  

Barb, on the other hand, is a magnificent magician who can transform these little minds of mush into masters of multiple academic disciplines. Using a teaching method known as Integrated Thematic Instruction, she weaves together the different subjects based on a year-long theme. So math, science, English, and even music are all integrated around one main theme, which this year is “Building for Success.” This theme is not only the central consideration for developing her academic curriculum, but it is also the basis for teaching life skills such as caring, cooperation, friendship, integrity, perseverance, problem solving, and responsibility.  

Looking at what she is doing, I realized in many ways, the Uniform Prudent Investor Act (“UPIA”, “Act”) is a model of Integrated Thematic Instruction. As has been explained earlier, “The Uniform Prudent Investor Act undertakes to update trust investment law in recognition of the alterations that have occurred in investment practices.” This update was necessary to bring fiduciary practices in line with current economic knowledge “about the behavior of capital markets.” It was achieved by altering the criteria for prudent investing from a results standard to a prudent process standard based on “the main theme of modern investment practice, sensitivity to the risk/return [tradeoff].”

This theme is integrated into a prudent process in subsections (a) and (b) of Section 2, with the requirement that the risk/return tradeoff is considered when:

1. Defining objectives reasonably suited to the trust,

2. Establishing an overall investment strategy,

3. Determining the purposes, terms, distributions requirements, and other circumstances of the trust,

4. Exercising reasonable care, skill, and caution, and

5. Evaluating individual assets in the context of the [investment] portfolio as a whole.  

At the heart of Barb’s program are behavioral guidelines for classroom conduct. Students are expected to use these guidelines in their daily interactions and they are held accountable to them throughout their entire school experience. Likewise at the heart of the Uniform Prudent Investor Act are duties that make up a prudent investment process. Fiduciaries are expected to follow this process and if they don’t they can be held liable for any investment losses.  

“Building for Success” is the theme for Barb’s students and “The tradeoff between risk and return is identified as the fiduciary’s [main theme and] central consideration.” The school’s curriculum and the behavioral guidelines for students are woven into their theme, just as the standards of the law and the duties of fiduciaries are woven into the theme of the Uniform Prudent Investor Act. With this in mind, notice as you read through the fables in this section how the risk/ return tradeoff influences the duties and responsibilities of fiduciaries.