The Prudent Investor Rule: How Ontario Trustees Must Invest Trust Assets

If you have been named trustee of a family trust, a trust created under a will, or a Henson trust for a family member with a disability, "manage the money responsibly" is not just friendly advice — it is a legal duty. Ontario's prudent investor rule sets the standard every trustee is held to when they invest trust property, and falling short of it can mean personal liability to the people the trust was set up to benefit.

This article explains what the prudent investor standard actually requires, how it differs from the older approach it replaced, and what happens when a trustee's investment choices are challenged.

What the Prudent Investor Rule Actually Means

Ontario's Trustee Act sets out the modern standard that governs how a trustee must invest property they hold for someone else. In broad terms, a trustee must invest the way a prudent investor would invest their own money — taking into account the purpose of the trust, the terms of the trust document, and the needs of the people who benefit from it.

This is a standard of conduct, not a guarantee of results. A trustee is not expected to be a financial genius, and the law does not judge them by whether an investment happened to lose value. It judges them by whether their overall process, and the portfolio they built, was a reasonable and informed one at the time decisions were made.

From a "Legal List" to a Portfolio Approach

Ontario law used to take a much more restrictive approach to trustee investing, limiting trustees to a narrow list of pre-approved, low-risk investment types. That approach has given way to a more flexible, modern standard.

Factors a Trustee Must Actually Weigh

There is no single "correct" portfolio for every trust. What the prudent investor standard asks for is a genuine, documented decision-making process. Factors a trustee should generally be considering include:

• [ ] General economic conditions and the effect of inflation or deflation
• [ ] The expected total return from income and capital appreciation together
• [ ] The role each investment plays within the trust's overall portfolio
• [ ] The need for diversification across different types of investments
• [ ] The beneficiaries' need for regular income versus long-term growth
• [ ] How liquid the trust's assets need to be to meet expected payments
• [ ] Tax consequences of buying, holding, or selling a given investment
• [ ] Any special value an asset may have to the trust or its beneficiaries (for example, a family property the trust document asks the trustee to preserve)

Diversification and the Portfolio Approach

One of the most important shifts in the modern rule is that a single underperforming investment is not, by itself, proof that a trustee acted improperly. Courts look at the trust's investments as a whole. A well-diversified portfolio that experiences one weak holding can still reflect a prudent overall strategy, while an undiversified, high-risk portfolio can be imprudent even if it happens to perform well for a period.

This is why trustees are generally expected to avoid concentrating trust assets too heavily in a single stock, sector, or asset class, absent a specific, documented reason tied to the trust's purpose.

Can a Trustee Delegate Investment Decisions?

Yes — a trustee can generally retain a financial advisor, portfolio manager, or investment firm to handle day-to-day investment decisions. Delegation is common and often sensible, particularly for trustees without financial expertise.

Delegating does not eliminate the trustee's responsibility, though. A trustee who delegates is still expected to:

• Choose the delegate with reasonable care
• Set out clear investment objectives consistent with the trust's terms
• Monitor the delegate's performance on an ongoing basis
• Step in if the delegate's approach no longer looks prudent

A trustee cannot simply hand the file to an advisor and stop paying attention.

What Happens When a Trustee Gets This Wrong

If a beneficiary believes a trustee invested imprudently, the usual route is to compel the trustee to formally account for their administration of the trust — commonly called passing of accounts — so the court can review what was done and why. If a court finds the trustee breached the prudent investor standard, the trustee can be held personally liable to restore losses the breach caused to the trust.

Importantly, courts assess the trustee's process and the circumstances at the time decisions were made — not simply whether, in hindsight, a different choice would have performed better. A trustee who documents their reasoning, seeks appropriate advice, and revisits the portfolio periodically is in a far stronger position than one who cannot explain their approach at all.

Frequently asked questions