Uniform Prudent Investor Act

Here is a question that looks very similar to something you might see on the Series 65 or 66:

According to the Uniform Prudent Investor Act, when may a trustee choose not to diversify the assets of the trust?
A. During a prolonged bear market for stocks
B. When choosing not to diversify best meets the needs of the beneficiaries
C. Under no circumstances
D. When the assets are 100% cash

Notice how a person who has not studied could easily talk himself into any of the four answers. Under no circumstances looks very tempting on a regulatory exam. Putting the assets all in cash seems pretty darned prudent, too. Hmm. Unfortunately, the Series 65/66 will pull sections out of various actual and model acts and expect candidates to be familiar with them. This question is pulling a section almost verbatim from the Uniform Prudent Investor Act, which states:

A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.

And that pretty well answers the practice question above, doesn't it? The answer, according to Section 3 of the Uniform Prudent Investor Act, is B, "When choosing not to diversify best meets the needs of the beneficiaries." As usual, the exam material seems to talk from both sides of its mouth. What it just told us is that a fiduciary/trustee should always diversify the assets of a trust, except when he shouldn't.

Oh well. That's what we're dealing with here on these exams. No need to get frustrated--we just have to deal with the exams on their own terms. Pass the test, and move on with your life.