By Jacob D. Palkowski
Introduction
Prudence has always been the cornerstone of fiduciary investing, but what prudence looks like has changed. From the cautious prudent man rule to the portfolio-based standards of the Uniform Prudent Investor Act, trust law has evolved alongside financial theory. Now, as artificial intelligence enters the investment process, the same framework must determine whether delegating to algorithms can still satisfy fiduciary responsibility.
I. The Evolution From the Prudent Man Rule to the Prudent Investor Rule
The prudent investor rule is a modern fiduciary standard that evolved from the 19th century prudent man rule, fundamentally transforming how trustees and other fiduciaries are expected to manage trust investments.[1] Its origins trace back to the landmark 1830 Massachusetts Supreme Judicial Court decision in Harvard College v. Amory, which established the foundation of the prudent man rule.[2] In that case, the Massachusetts Supreme Judicial Court held that trustees must “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”[3] This formulation emphasized capital preservation and evaluated prudence on an investment-by-investment basis.[4]
For more than 160 years, the prudent man rule dominated trust law.[5] Trustees generally had to assess each investment on its own and avoid speculative or higher-risk investments.[6] As articulated in Withers v. Teachers’ Retirement System of New York, under the traditional rule, “the focus of the court’s inquiry is the individual investment itself rather than the performance of the portfolio as a whole.”[7] Over time, however, this approach became increasingly anachronistic. The rise of modern investment theory, coupled with sustained inflationary pressures from the 1970s through the mid-1990s, exposed the limitations of overly conservative investment strategies that prioritized nominal capital preservation at the expense of long-term growth.[8]
II. The Uniform Prudent Investor Act and the Shift to Portfolio-Level Analysis
The transition to the modern prudent investor rule occurred primarily through state adoption of the Uniform Prudent Investor Act (UPIA), which has now been enacted in most jurisdictions.[9] The UPIA fundamentally shifted fiduciary investment analysis away from individual assets and toward portfolio-wide performance, explicitly incorporating principles of modern portfolio theory developed by economists such as Harry Markowitz.[10]
Under the UPIA framework, trustees are required to diversify trust assets unless they reasonably determine that, because of special circumstances, the purposes of the trust are better served by a non-diversified strategy.[11] This requirement represents a significant departure from traditional trust law. As the Virginia Supreme Court observed in Carlson v. Wells, the prudent investor rule permits fiduciaries to engage in measured risk-taking in pursuit of higher returns and evaluates fiduciary conduct based on the overall performance of the portfolio rather than the success or failure of individual investments.[12]
III. Delegation Under the Modern Prudent Investor Framework
Historically, trust law strongly resisted the delegation of investment authority. Although the Restatement (First) of Trusts (1935) and the Restatement (Second) of Trusts (1957) recognized that no particular type of investment was per se forbidden, they maintained a restrictive view of delegation.[13] The Restatement (Second) of Trusts stated that “the trustee is under a duty to the beneficiary not to delegate to others the doing of acts which the trustee can reasonably be required personally to perform.”[14] Commentators to Section 225 further emphasized that delegation of investment duties was generally improper, leaving trustees with the difficult task of determining which responsibilities could permissibly be delegated.[15]
This restrictive approach changed with the adoption of the Restatement (Third) of Trusts in 1992, which sought to modernize trustees’ investment management powers in light of contemporary financial practices.[16] The principles articulated in the Restatement (Third) directly informed the UPIA, which expressly permits trustees to delegate investment and management functions, subject to defined procedural safeguards.[17]
Under Uniform Trust Code Section 807 and Section 9 of the UPIA, a trustee may delegate duties and powers to an agent if the trustee exercises reasonable care, skill, and caution in: (1) selecting the agent; (2) establishing the scope and terms of the delegation consistent with the purposes and terms of the trust; and (3) periodically reviewing and monitoring the agent’s actions to ensure compliance with the delegation.[18]
Notably, the UPIA does not define the term “agent.”[19] This omission reflects the Act’s intentionally flexible, process-oriented framework. Rather than prescribing specific qualifications or professional credentials, the UPIA focuses on the trustee’s conduct in selecting and supervising the agent and imposes a duty on the agent to exercise reasonable care in performing delegated functions.[20] As a result, trustees may delegate to a wide range of appropriate professionals—including investment advisors, attorneys, auditors, and other specialists—so long as the statutory standards of prudence are satisfied.[21]
IV. The Use of Artificial Intelligence in Investment Management
Artificial intelligence (AI) has become an increasingly influential tool in modern investment management, reshaping how investment decisions are generated, implemented, and monitored across the financial services industry.[22] AI applications—such as robo-advisors that allocate assets, chatbots that handle routine communications, and risk-analysis tools—operate much like delegated agents, performing administrative and investment functions while the trustee retains ultimate fiduciary responsibility.[23] Collectively, these technologies facilitate automated financial recommendations, portfolio management, and contract execution through digital platforms supported by machine learning.[24]
The growing reliance on AI-driven investment tools has prompted heightened regulatory attention.[25] In July 2023, the Securities and Exchange Commission proposed new rules addressing conflicts of interest arising from broker-dealers and investment advisers’ use of predictive analytics and artificial intelligence.[26] The proposal targets the use of “covered technology,” including AI, machine learning, and other predictive analytic tools used in investor interactions.[27] Under the proposed framework, firms would be required to eliminate or neutralize conflicts of interest when AI systems place the firm’s interests ahead of investors’, such as when algorithms are designed to optimize firm revenue, data collection, or proprietary product placement rather than investor welfare.[28] The proposed rules also require firms to adopt written policies and procedures governing AI use and to maintain records documenting compliance.[29]
The Commodity Futures Trading Commission (CFTC) has taken a parallel approach, emphasizing that the adoption of AI does not displace existing regulatory obligations.[30] In a recent staff advisory, the CFTC clarified that all regulated entities must remain in compliance with the Commodity Exchange Act and applicable CFTC regulations regardless of whether AI tools are developed internally or procured from third-party vendors.[31] The advisory, while not intended as a standalone compliance checklist, highlights existing regulatory requirements that AI adoption may implicate.[32] The staff advisory further stresses the need for entities to assess AI-related risks and to update policies, procedures, controls, and systems as appropriate, subjecting AI implementation to the same compliance review as any other material change in investment processes.[33]
Taken together, these regulatory developments highlight that the use of AI in investment management does not diminish fiduciary responsibility, but instead reframes how traditional duties must be discharged.[34] As trustees may increasingly rely on AI-driven systems to inform or execute investment decisions, the UPIA provides the relevant framework for evaluating whether such reliance constitutes prudent delegation, particularly with respect to the fiduciary obligations of selection, oversight, and accountability.[35]
V. Delegation of Investment Authority to AI Under the Prudent Investor Rule
Case law interpreting the UPIA’s delegation provisions consistently emphasizes the delegating fiduciary’s retained responsibilities rather than the characteristics of the agent itself.[36] When courts analyze compliance with the UPIA, they focus on whether the fiduciary exercised prudence in the delegation process—selection, scope, and oversight—rather than on who or what performed the delegated function.[37]
In O’Neill v. O’Neill, the Ohio Court of Appeals articulated a three-part delegation framework under Ohio’s version of the UPIA, requiring fiduciaries to: (1) prudently select an agent; (2) establish the scope and terms of the delegation consistent with the purposes and terms of the trust; and (3) periodically review the agent’s actions to ensure compliance with the delegation.[38] This framework emphasizes that delegation does not relieve fiduciaries of responsibility, but instead shifts the analysis to whether the fiduciary’s ongoing oversight satisfies the statutory standard of care.[39]
Similarly, in In re Estate of Cooper, the court clarified that fiduciaries “shall not be responsible for the investment decisions or actions of the investment agent” when they fulfill their procedural obligations of prudent selection, scope establishment, and periodic review.[40] Therefore, the focus remains on whether the fiduciary properly executed these three core responsibilities rather than on the agent’s credentials, technology, or decision-making methodology.[41]
Notably, research across federal and state jurisdictions reveals no statutory provisions that categorically prohibit AI systems from serving as investment agents under the UPIA. In Knight v. Commissioner, the United States Supreme Court observed that 44 states and the District of Columbia have adopted versions of the UPIA, with the remaining states adopting comparable prudent investor standards.[42] This widespread adoption has produced a largely uniform delegation framework that does not exclude nontraditional or technology-based agents.[43]
A. Delegating to AI Under the UPIA
AI delegation may be permissible under the UPIA if appropriate oversight mechanisms are in place.[44] As the Woodward School court observed, even when trustees receive investment advice, “a trustee is not required to follow it,” emphasizing that the fiduciary remains ultimately responsible for investment decisions.[45] Applied to AI, this principle requires trustees to maintain meaningful oversight and retain the ability to intervene when the AI’s decisions conflict with trust purposes or beneficiary interests.[46]
Under the prudent selection standard, delegation to AI would likely require extensive due diligence.[47] The New York Surrogate’s Court has observed that delegation must be “consistent with the duty to exercise skill, including special investment skills.”[48] Accordingly, trustees delegating investment functions to AI must carefully assess the system’s capabilities, track record, and limitations prior to implementation.[49]
The prudent investor standard further underscores the trustee’s continuing responsibilities.[50] Trustees must “invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.”[51] When delegating to AI, this standard will require trustees to confirm that the system is capable of considering these contextual factors and to supplement automated decision making with human oversight to address any limitations in the AI’s reasoning or data.[52]
B. The Steps to Delegate to AI Under the UPIA
Proper delegation under the UPIA is governed by a set of procedural safeguards designed to preserve fiduciary accountability while permitting trustees to rely on specialized expertise.[53] Section 9 of the UPIA expressly authorizes trustees to delegate investment and management functions, provided that they exercise reasonable care, skill, and caution in doing so.[54] When applied to AI-based investment systems, this framework does not prohibit delegation to nontraditional agents, but instead conditions its permissibility on the fiduciary’s adherence to three core requirements: prudent selection, clearly defined delegation terms, and ongoing monitoring.[55]
First, UPIA Section 9(a) requires trustees to exercise reasonable care, skill, and caution in selecting an agent.[56] In the context of AI delegation, this obligation translates into a duty to evaluate the system’s design, capabilities, and reliability in light of the trust’s investment objectives.[57] Prudent selection may include assessing the AI system’s historical performance, underlying data sources, decision-making methodologies, built-in risk controls, and susceptibility to conflicts of interest or bias.[58] Where AI systems are provided by third-party vendors, trustees must also consider the vendor’s expertise, transparency, and compliance infrastructure.[59] Importantly, the UPIA does not require the agent to meet the fiduciary’s own standard of care; rather, it requires the fiduciary to act prudently in the selection process itself.[60] Since many AI systems operate as opaque “black-box[es],” their limited transparency and explainability may make it more difficult for trustees to demonstrate that they satisfy this statutory duty of prudent selection under UPIA Section 9(a).[61]
Second, UPIA Section 9(a)(2) requires trustees to establish the scope and terms of the delegation in a manner consistent with the purposes and terms of the trust.[62] Applied to AI systems, this requirement demands that trustees define the boundaries of algorithmic authority with specificity.[63] Trustees must determine which investment functions may be automated, the asset classes or strategies the AI may employ, applicable diversification requirements, risk tolerances, liquidity constraints, and performance benchmarks.[64] Clear delegation terms also require trustees to retain authority over material decisions, such as changes to investment objectives or deviations from trust terms.[65] By constraining AI discretion through clearly articulated parameters, trustees ensure that automated decision making remains aligned with fiduciary objectives rather than operating autonomously or opaquely.[66]
Third, UPIA Section 9(a)(3) imposes an ongoing duty to monitor the agent’s performance and compliance with the delegation terms.[67] This monitoring obligation is particularly critical in the AI context where automated systems may evolve over time through machine learning or adaptive algorithms.[68] Trustees must periodically review investment outcomes, test compliance with defined constraints, and assess whether the AI system continues to serve the trust’s purposes.[69] Monitoring also includes reviewing system updates, model changes, and performance anomalies, as well as reevaluating the delegation in response to market conditions or changes in trust circumstances.[70] Passive reliance on automation, without meaningful review, would be inconsistent with the UPIA’s requirement of continued fiduciary oversight.[71]
Taken together, these safeguards demonstrate that the UPIA’s delegation provisions are process-oriented rather than agent-specific.[72] The Act does not require an agent to be human, nor does it exclude technologically mediated decision-makers.[73] Instead, it conditions lawful delegation on whether the trustee has exercised prudence in selecting, structuring, and supervising the delegated function.[74] When trustees implement these procedural protections, AI systems can likely function as permissible agents under the UPIA, serving as tools of delegated investment management rather than substitutes for fiduciary responsibility.[75]
Conclusion
The evolution from the prudent man rule to the modern prudent investor framework reflects trust law’s enduring commitment to process over form. As investment management has grown more complex, the UPIA has responded not by restricting innovation, but by insisting that fiduciary discretion be exercised through prudent selection, defined delegation, and ongoing oversight. AI fits squarely within this framework. When deployed with appropriate safeguards, AI does not displace fiduciary judgment but operates as a delegated tool subject to the trustee’s continuing responsibility. The UPIA’s flexible, process-oriented delegation provisions thus provide a principled basis for accommodating emerging technologies while preserving the core fiduciary obligations of prudence, loyalty, and accountability.
[1] ALI, Looking Back on 25 Years of The Prudent Investor Rule (July 16, 2015), https://www.ali.org/news/articles/looking-back-25-years-prudent-investor-rule [https://perma.cc/8R5F-53GR].
[2] See Harv. Coll. v. Amory, 9 Pick. 446 (Mass. 1830).
[3] Id. at 461.
[4] Franke Beckett, 5.1 The “Prudent Man Standard”, https://frankebeckett.com/articles/5-1-prudent-man-standard/#:~:text=The%20prudent%20man%20standard%20is%20a%20common%2Dlaw,applied%20by%20courts%20on%20an%20investment%2Dby%2Dinvestment%20basis[https://perma.cc/6S66-ACT5] (last visited Feb. 3, 2026). Under the “prudent man” standard, trustees must invest carefully by limiting risk, focusing on long-term growth, and generating a reasonable level of income. M. Gayle Robinson, EPIC Article I, Part 5: The Prudent Investor Rule, SMB (Mar. 2000), https://www.michbar.org/journal/article?articleID=46&volumeID=6&…#:~:text=The%20Prefatory%20Note%20to%20the,now%20permitted%2C%20subject%20to%20safeguards[https://perma.cc/J7FU-E7T3].
[5] Martin D. Begleiter, Does the Prudent Investor Need the Uniform Prudent Investor Act – An Empirical Study of Trust Investment Practices, 51 Me. L. Rev. 27, 28 (1999).
[6] See In re Cook’s Tr. Est., 171 A. 730, 731 (Del. Ch. 1934).
[7] Withers v. Tchrs.’ Ret. Sys. of N.Y., 447 F. Supp. 1248, 1255 (S.D.N.Y. 1978).
[8] Raymond Radigan & Jennifer F. Hillman, The Evolution of Prudence in Trustee Investing, N.Y. L.J. (July 9, 2013), https://rmfpc.com/wp-content/uploads/2022/08/The-Evolution-of-Prudence-in-Trustee-Investing.pdf [https://perma.cc/C82A-4Z93].
[9] Uniform Prudent Investor Act, Legal Info. Inst., https://www.law.cornell.edu/wex/uniform_prudent_investor_act [https://perma.cc/U49J-V6QY](last visited Feb 3, 2026). The UPIA establishes standards governing trustees’ investment and management of trust assets. Unif. L. Comm’n, Prudent Investor Act, https://www.uniformlaws.org/committees/community-home?CommunityKey=58f87d0a-3617-4635-a2af-9a4d02d119c9 [https://perma.cc/2KEU-TTU9] (last visited Feb. 10, 2026). In fulfilling these duties, trustees must consider a range of relevant factors, including the tradeoff between risk and return, the beneficiaries’ needs and circumstances, the effects of inflation or deflation, general economic conditions, potential tax consequences, and the beneficiaries’ requirements for liquidity, income, or preservation of capital. Id.
[10] Jeremy Lau, The Prudent Investor Rule and UPIA: Intro To Trustee Investing, Prudent Invs. (Apr. 26, 2023), https://www.prudentinvestors.com/blog/the-prudent-investor-rule-and-upia-intro-to-trusting-investing/ [https://perma.cc/2TXC-UJEJ]. Modern Portfolio Theory, developed by Harry Markowitz, provides a framework that helps fiduciaries manage investment portfolios more effectively. Id. The theory is built on three core principles: (i) the relationship between risk and return; (ii) diversification; and (iii) correlation among assets. Id. Under this framework, risk is reduced primarily through diversification, which in turn depends on analyzing correlations between assets to ensure the portfolio is properly diversified. Id.
[11] Tex. Prop. Code Ann. § 117.005 (2024).
[12] Carlson v. Wells, 705 S.E.2d 101, 106 (Vir. 2011).
[13] Charles M. Bennett, When the Fiduciary’s Agent Errs—Who Pays the Bill—Fiduciary, Agent, or Beneficiary?, 28 Real Prop., Prob & Tr. J. 429, 444 (1993).
[14] Restatement (Second) of Trusts § 171 (A.L.I. 1957).
[15] Id. § 225. A trustee’s responsibilities fall into three main areas: administration, investment management, and discretionary distributions. Quinn DeAngelis, What Should You Delegate, DeAngelis Legal (June 15, 2021), https://www.deangelislegal.com/delegation-of-trustee-powers/ [https://perma.cc/MZ7D-JDDM]. Trustees commonly delegate administrative tasks and investment management. They should not delegate core discretionary decisions, however, especially distribution determinations, or functions they are uniquely qualified to perform. Id.
[16] Bennett, supra note 13.
[17] Unif. Prudent Inv. Act § 9 (Unif. L. Comm’n 1994).
[18] Id.; see also Unif. Tr. Code § 807 (Unif. L. Comm’n 2000, amended 2010).
[19] See generally Unif. Prudent Inv. Act.
[20] See id. § 9.
[21] Id. § 9 cmts.
[22] Larry Cao, Handbook of Artificial Intelligence and Big Data Applications in Investments, CFA Inst. Res. Found. (Mar. 27, 2023), https://rpc.cfainstitute.org/research/foundation/2023/ai-and-big-data-in-investments-handbook [https://perma.cc/Z2PW-NAYW].
[23] Darko B. Vuković, Senanu Dekpo-Adza & Stefana Matović, AI integration in financial services: a systematic review of trends and regulatory challenges, Human. Soc. Sci. Commun. 12, 562 (2025) https://doi.org/10.1057/s41599-025-04850-8 [https://perma.cc/8MH5-HA96].
[24] Id.
[25] Id.
[26] Pablo J. Man, A New Frontier: The SEC Addresses Artificial Intelligence (And A Whole Lot More), K&L Gates (Aug. 16, 2023), https://www.klgates.com/A-New-Frontier-The-SEC-Addresses-Artificial-Intelligence-and-a-Whole-Lot-More-8-16-2023 [https://perma.cc/QNC5-7AFN].
[27] Id.
[28] Id.
[29] Id.
[30] Latham & Watkins LLP, CFTC Issues Staff Advisory on the Use of Artificial Intelligence in CFTC-Regulated Markets (Dec. 20, 2024), https://www.lw.com/admin/upload/SiteAttachments/CFTC-Issues-Staff-Advisory-on-the-Use-of-Artificial-Intelligence-in-CFTC-Regulated-Markets.pdf [https://perma.cc/V6HG-7WQ7].
[31] Id.
[32] Id.
[33] Id.
[34] See generally Man, supra note 26; see also Latham & Watkins LLP, supra note 30.
[35] Unif. Prudent Inv. Act § 9 (Unif. L. Comm’n 1994).
[36] See Matter of Wellington Trs., 165 A.D.3d 809 (2018); see also O’Neill v. O’Neill, 169 Ohio App. 3d 852 (2006).
[37] O’Neill, 865 N.E.2d at 920–23.
[38] Id.
[39] Id.
[40] See In re Est. of Cooper, No. 4801COF1998, 2005 WL 3739300, at *5 (Pa. Com. Pl. June 7, 2005).
[41] Id.
[42] Knight v. Comm’r., 552 U.S. 181, 186 n.2 (2008).
[43] See generally Unif. Prudent Inv. Act § 9 (Unif. L. Comm’n 1994).
[44] Id.
[45] The Woodward Sch. For Girls, Inc. v. City of Quincy, 469 Mass. 151, 163 (Mass. Sup. Jud. Ct. 2014).
[46] Id.
[47] See generally Matter of Est. of Younker, 174 Misc. 2d 296 (N.Y. Sur. Ct. 1997).
[48] Id. at 299.
[49] Unif. Prudent Inv. Act § 9(a) (Unif. L. Comm’n 1994).
[50] Id. § 2(a).
[51] Id.
[52] Id.
[53] See generally id. § 9.
[54] Id.
[55] Id.
[56] Id. § 9(a)(1).
[57] Josh Yager, UPIA §9 re Prudent Delegation of Investment Duties, Anodos L., https://trustee-help.com/PRUDENT-DELEGATION-OF-INVESTMENT-DUTIES/#:~:TEXT=THE%20PRUDENT%20INVESTOR%20ACT%20DIRECTS,THE%20TERMS%20OF%20THE%20DELEGATION [https://perma.cc/KGU7-DGL5] (last visited Feb. 7, 2026).
[58] Amy D. Roy & Robert A. Skinner, Meeting the AI Moment in Asset Management: An Agenda for Industry Lawyers, Ropes&Gray (Sep. 24, 2025), https://www.ropesgray.com/en/insights/alerts/2025/09/meeting-the-ai-moment-in-asset-management-an-agenda-for-industry-lawyers [https://perma.cc/DQM8-Y6F2].
[59] David Stapleton, Beyond the Checklist: Embedding Ethical AI Principles in Your Third-Party Compliance Assessments, ISACA (Sep. 11, 2025), https://www.google.com/search?client=safari&rls=en&q=Beyond+the+Checklist%3A+Embedding+Ethical+AI+Principles+in+Your+Third-Party+Compliance+Assessments&ie=UTF-8&oe=UTF-8 [https://perma.cc/3YXW-4TGF].
[60] See Unif. Prudent Inv. Act § 9(a)(2).
[61]See id.; see also Stephen Casper, Black-Box Access is Insufficient for Rigorous AI Audits, Arxiv, https://arxiv.org/abs/2401.14446 [https://perma.cc/2J83-8H2M] (last visited May 29, 2024). Recent audits of advanced AI systems have mostly treated them as “black-box[es],” where auditors can only test the system and see the results produced. Id.
[62] Unif. Prudent Inv. Act § 9(a)(2).
[63] Id.
[64] Uniform Prudent Investor Act, supra note 9.
[65] Forman L. Firm, For Trustees – A Word to the Wise, https://www.formanlawfirm.com/types-of-claims/for-trustees-a-word-to-the-wise/#:~:text=A%20Trustee’s%20Duty%20of%20Prudence,tax%20consequences%20for%20the%20trust [https://perma.cc/7AGT-HT9M] (last visited Feb. 7, 2026).
[66] Id.
[67] Unif. Prudent Inv. Act § 9(a)(3).
[68] Lifestyle Sustainability, Why Is Ongoing Monitoring of AI Systems Needed? (Mar. 18, 2025), https://lifestyle.sustainability-directory.com/question/why-is-ongoing-monitoring-of-ai-systems-needed/ [https://perma.cc/SS96-CRMZ].
[69] See generally Unif. Prudent Inv. Act § 9(a)(3).
[70] Lifestyle Sustainability, supra note 68.
[71] Unif. Prudent Inv. Act § 9 (a)(3).
[72] See generally id. § 9.
[73] See generally id.
[74] Id.
[75] See generally id.