Do you care about a nonprofit in your capacity as a board member, trustee, or staff person? Nonprofits are vital to our community. Without them, our quality of life simply would not be the same, especially in a community as involved in philanthropic endeavors as Pittsburgh.
If the nonprofit you are involved with has planned carefully over the years and built up an endowment or surplus fund, here are five things to consider about caring for those funds.
1. Do you have an Investment Policy Statement (IPS)?
This is the roadmap on how to manage, grow, and protect your funds. The IPS sets forth the organization’s mission and goals and structures the investment objectives to achieve those benchmarks. The policy addresses risk tolerance, what to invest in, what not to invest in, as well as timelines. It reflects a thorough understanding between the investment advisor and the organization, helps you comply with the Sarbanes-Oxley Act (mandating that top management must now individually certify the accuracy of an organization’s financial information), and helps to ensure that you uphold your fiduciary duties. Your IPS should be reviewed annually to properly reflect changes that may have occurred during the year.
2. Do you know what your returns are and how they compare with applicable return and risk benchmarks?
Measuring your endowment returns and your organization’s goals against applicable benchmarks is critical to good governance. Applicable benchmarks imply that there are several ways to measure returns and risk. A portfolio should be personalized to the organizational goals using the time-tested principles of asset allocation. Using only one benchmark may tell only part of the story. In fact, several benchmarks may be used for comparison purposes. Are you aware of the risks that impact your investments, including market, liquidity, inflation, spending assumptions, and lack of diversification?. Ideally, a trusted investment advisor will review these and inform the board on a regular basis.
3. Is your money safe?
As a board member, CEO, or CFO of an organization, do you understand how the funds are invested and at what risk level? Are your investments diversified? How often are the monies reallocated to be sure you are in compliance with the IPS and have appropriately balanced risk and reward? Are your statements audited? Understandable? Are you using an advisor? Many organizations are inundated with day-to-day operations, and costs of managing your investments yourself can be quite high. Seeking a professional investment advisor specializing in the management of fiduciary assets is a prudent and (I would argue) essential decision.
4. Are you fulfilling your fiduciary responsibility?
A board member acts as the trustee of the organization’s assets and must exercise due diligence to ensure that the organization is well-managed and financially sound. Fiduciary duty requires trust, honesty, loyalty and your utmost attention. Many people are surprised to learn that Directors & Officers insurance doesn’t always cover your fiduciary liability, if there’s a breach. (That can be true on alleged fiduciary breaches in retirement plan assets, too.) Using a Registered Investment Advisor (RIA) gives you a partner with whom to share that fiduciary responsibility. An RIA can take on that liability, whereas a broker cannot. Are you using a Registered Investment Advisor to help protect the organization and YOURSELF?
5. Do you know what you are paying in commissions and fees for proprietary products?
Are you paying commissions? That method of payment for services of a financial advisor or broker can lead to bias. Financial management that is fee-based ensures that you receive unbiased advice on appropriate investments. And, it’s not expensive…around 1 percent annually of your investments, depending on the total amount invested. There is also a potential for bias if the financial advisor or broker steers investments towards their in-house products. Can you be sure those products are best in order for your organization to meet their goals?
Dotti Bechtol is Fiduciary Asset Business Development Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at email@example.com. Dotti can also be reached for comment at 412-227-3200.