It’s essential that individuals on investment committees, or who play a part in overseeing a foundation or endowment’s investments, understand they’re acting in a fiduciary capacity—and the responsibilities of their role.
These individuals can help ensure a not-for-profit organization’s funds are managed and invested responsibly—and legally—by taking the time to understand their fiduciary duty as well as the organization’s unique investment policies and procedures.
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a good place to start when determining the responsibilities of a fiduciary. UPMIFA states that it provides “guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations and imposes additional duties on those who manage and invest charitable funds.”
UPMIFA also specifically provides several items an investment committee must consider when making investment decisions regarding its organization’s assets:
An investment committee must consider the charitable purposes of the organization and the fund, subject to the intent of a donor. For example, if a donor establishes an endowment to fund a scholarship, that money can’t be used to help fund a new campus building.
A committee must manage the fund prudently, an act that requires a reasonable standard of care and a commitment to act in good faith. UPMIFA provides further clarification around what prudent management entails, noting which factors an investment committee must consider.
- General economic conditions. Understanding the state of the current market and how economic conditions may affect investment decision making.
- Effects of inflation or deflation. Observing trends in the marketplace and incorporating this information in which strategies are selected.
- Expected tax consequences. This could include unrelated business taxable income on certain types of income from unrelated trade or business, such as, alternative investments or income from S-corporation stocks.
- Role within the overall portfolio. For example, this could mean determining if an investment has a low correlation to other assets in the portfolio, which could help to reduce risk.
- Expected total return. This includes return from both income and any appreciation of investments.
- Other organizational resources. For example, the organization expects donor gifts or owns mission-related businesses that generate income.
- Distributions and capital preservation. It can be challenging for an organization to make 5% distributions each year while maintaining enough growth to keep up with inflation. Assuming 2.5% inflation, that requires a total of at least 7.5% return on an annualized basis. It’s important to remember that assets don’t have to see that level of return every year, and some years will be worse and some better—it’s the average over time that matters.
- Charitable purpose. An asset’s relationship to the organization’s charitable purposes should be considered. For example, an investment that would normally be considered too risky for an organization may be allowable if its purpose is related to the not-for-profit’s mission.
Third-Party Investor Verification and Fees
An investment committee must only incur costs that are appropriate and reasonable and make an effort to verify facts relevant to the management and investment of the fund.
Managing charitable organizational funds in a prudent manner isn’t an easy task. To help board members who may not be experienced investors, a not-for-profit may hire an external investment manager. This doesn’t absolve committee members of their fiduciary duty, however—an investment committee must still verify the information provided by its investment managers and understand how and why specific assets are invested.
Fees paid to those advisors should be reasonable when compared with industry averages.
Policies and Procedures
A charitable organization’s board should verify that the not-for-profit has adequate policies and procedures, known as an investment policy statement (IPS), in place to protect its assets.
An IPS helps ensure the investment committee and any investment managers who’ve been hired are on the same page and managing portfolios according to UPMIFA guidelines. It should be regularly reviewed by the investment committee to verify it meets the organization’s needs and goals.
If an organization doesn’t have an IPS, it’s common for the investment committee to draft one. Hired investment advisors often will assist in this process.
- Investment time horizon—how soon the organization will need these funds
- Risk tolerance—how much risk the organization can afford to take on
- Investment return goals
- Asset allocation strategy
- Portfolio rebalancing
- Monitoring and reporting system
- Fees and expenses
- Duties and responsibilities
It’s important for board members and investment committee members to understand their responsibilities as fiduciaries. It’s also imperative that an organization has well-defined roles and structures in place—including a well-drafted IPS—to help these individuals perform their roles.
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For more information on your board members’ and investment committee’s fiduciary responsibility, contact your Moss Adams professional.