You might not guess that in the United States alone, non-profit corporations and foundations manage more than $5 trillion in assets. If U.S. non-profits and foundations were a country, they’d represent the 20th largest economic power in the world, wedged somewhere in between Argentina and Saudi Arabia.
Large or small, the institutional assets of non-profits and foundations must be held and managed to a fiduciary level of care by Board members, officers, and staff members. As providers of independent asset management in Topeka, KS, we assist numerous non-profits and foundations in the management of their investable assets. We have the following five tips to help non-profits and foundations in selecting and overseeing investment managers.
- Make sure the company and its Board of Directors have a full understanding of their fiduciary duty.
Serving on the Board of Directors of a non-profit or foundation carries the same duty of care and skill as serving on a for-profit board. Unfortunately, many Board members in the non-profit arena do not understand that the fact they may be volunteering does not alter their fiduciary duty of care. This obligation requires that each director serve honestly, free of conflicts and in the best interests of the corporation at all times. While directors do not have to be experts in the field of managing money, they should be reasonably informed as to such management by the non-profit or foundation.
- Investment managers should be held to the same fiduciary duty as Board members.
This rule may seem obvious, but I’ve served on a number of Boards where no Board member could tell you whether the company’s investment manager was held to a fiduciary duty. Investment managers held to a fiduciary duty will generally avoid commission-based products, soft-dollar arrangements, or kickbacks from companies in exchange for investable assets. The easiest way to avoid overpaying or being charged excessive fees is to demand the non-profit or foundation’s investment manager act as a fiduciary “at all times.” The easiest place to make this demand is within the organization’s Investment Policy Statement (IPS), which should govern the Board’s rules and procedures for investment management.
- Do the research.
Always require full disclosure of any legal or regulatory issues your investment advisor has encountered, and follow up with research, at a minimum, with the SEC and FINRA for any issues. Post-selection, review all statements from the investment manager carefully. It is not uncommon for investment managers to charge up to double their fee for small non-profits and foundations. Be aware of all fees charged, and seek information to ensure that your company is being billed in a fair and fiduciary manner.
- Issue an RFP and repeat to ensure that your money manager is competitive.
All non-profits and foundations with investable assets should issue a request for proposal (RFP) for competitive bids when seeking a financial advisor or investment manager. Once a selection is made, the RFP process should be repeated every five to 10 years to ensure that your manager is competitive both in performance and fees. The conclusion of the RFP process should result in a formal, written contract that demands low costs and restricts limitations of liability on the investment manager. Remember, there is no standard contract for investment managers.
- Demand measurements of performance.
All investment managers should have their performance judged relative to appropriate benchmarks. Such performance should always be reviewed “after fees” to get a true apples-to-apples comparison regarding the manager’s performance.
Always Follow Best Practices
While most non-profit and foundation board members serve as volunteers, their duty as a corporation fiduciary does not change. Even small non-profits manage millions of dollars on behalf of their organizations. Therefore, it’s critical that the directors, officers, and staff members of these companies follow best practices and never stop questioning how their money is being spent and invested.