Fiduciaries, Like Hunters, Exercise Extreme Caution

“Go stand in the corner.” “What for? It was only the barrel,” I protested, knowing it was an argument I wasn’t going to win. I had just broken my dad’s number one gun rule: ‘Know where your gun barrel is pointed at all times.’ And, by inference, it should never be pointed at another person, even if it’s not loaded, even if the safety is on and -- in this case -- even if it was broken down for cleaning and it was only a barrel without the chamber or magazine attached.  

Since hunting involves a loaded weapon, it is inherently risky. Therefore, a cautious hunter always follows a set of gun safety rules. My brother and I learned these rules from our Dad. The first thing we did when picking up a gun was to check to see if it was loaded. Even after confirming that it wasn’t, we were taught to still treat it as if it were. We never stored or transported a loaded gun and it remained empty until we were in the field ready to hunt. Once it was loaded, the safety was always on until the gun was shouldered and ready to fire.    

Investing is also inherently risky. In his book on the Uniform Prudent Investor Act, W. Scott Simon says, “…there is no panacea for investing. Because risk is risk there’s no guaranteed safe way to reap the rewards of investing in financial markets.” In recognition of this risk, the Uniform Prudent Investor Act requires fiduciaries, like hunters, to follow a set of rules. At the heart of these rules is the Prudent Investor Rule which requires a fiduciary to “…invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust [and] in satisfying this standard, [to] exercise reasonable care, skill, and caution.”  

While the general safety rules of hunting never changed, the gun selection, its set up and the type of shells used varied depending on the type of hunting and the size, strength, and skill level of the hunter. For example, my favorite gun was a 20-gauge Remington Model 17. Since it was lightweight, it was a great gun for pheasant and dove hunting, but its smaller bore made it less compatible with the large shot and higher shot speed required for goose hunting. The 12-gauge Browning A5 was a better gun for goose hunting. However, when I first started hunting I was too small to handle the Browning so, based on the circumstances, a cautious trade-off between risk and reward required me to use the 20-gauge.  

Circumstances also determine how a fiduciary balances the risk and return needs of a beneficiary’s portfolio. Caution would dictate that, for an elderly person with significant distributions needs, the investment portfolio should focus on safety of principal. For a younger person with little need for distributions, a cautious fiduciary would be more concerned about the long-term detrimental effect of inflation and would, therefore, allocate a significantly larger portion of the portfolio to stocks and other equities.  

Hunters have a set of gun safety rules to minimize the dangers to themselves and those around them in order to reduce the risk of a horrible accident. Fiduciaries go through a prudent process for the same reason: to minimize the dangers to their trust, charitable, or pension beneficiaries and the liabilities to themselves. Situations come up in a hunt where a cautious hunter needs to determine if a risk is worth taking. In the same way, a cautious fiduciary weighs the risks and returns based on the beneficiary’s circumstances to determine if a risk is worth taking. Hunting and investing are both dangerous activities, so fiduciaries (like hunters) must exercise extreme caution.