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Outsourced Investment Management for Nonprofit Boards and Foundations—the Fiduciary Approach

There was a time when the only investment decision made by most nonprofit investment committees was how many banks they would need to contact for the best rate of return on CDs or money market accounts. For larger nonprofits, board members would spend countless hours educating themselves and seeking the best available investment advice for institutional endowments, often with very limited resources or experience.

 

 

With the recognition of the fiduciary duty owed by nonprofit board members together with the need for a greater rate of return on assets, numerous nonprofits and foundations have delegated the investment management function under the outsourced chief investment officer (CIO) model. Such outsourcing can provide much-needed investment management experience and assist largely volunteer board members in navigating a complex investment environment.

While there are a number of ways nonprofit boards and foundations can seek to outsource investment decisions, their primary guide in pursuing the outsourced CIO model should be maintaining their fiduciary duty to the organization at all times.

Guidelines for Outsourcing Investment Decisions

For best practices, we recommend the following guidelines when outsourcing an organization’s investment decisions.

  1. Issue a properly stated request for proposal (RFP) for services, seeking only those investment managers who serve as full-time fiduciaries to their institutional clients. Conduct careful interviews, and insist on references. Doing so can help ensure that the board of directors meets its fiduciary duty to act in the best interests of the organization in managing investment assets.
  2. Work with the outsourced investment manager on a comprehensive investment policy statement that reflects the organization’s risk tolerance and investment strategy.
  3. Set up policies and procedures to regularly monitor the outside investment firm’s performance and decisions, including measuring against appropriate benchmarks. Demand that those responsible for investment decisions make themselves available for regular review by the board of directors or its investment committee.
  4. Consider flexible management of your organization’s total portfolio by dividing up the total investment pool among multiple outside investment officers. Doing so can allow for greater diversification and protection of assets, particularly for organizations with larger portfolios.
  5. Don’t forget to issue RFPs semi-regularly (every five years, at a minimum) even if the board of directors is pleased with its outside investment officer. With the pressure of limited resources facing so many nonprofits and foundations, boards of directors owe it to the organization to ensure that the outside investment officer is providing services and performance competitive within the community.

Kansas alone is home to thousands of nonprofit corporations and foundations with potential investable assets. Outsourcing investment decisions can greatly benefit nonprofit and foundation boards by removing a great deal of the work and expense involved in making complex investment decisions.

However, choosing the outsourced investment officer model alone does not equate to meeting the board of directors’ fiduciary duty. A fiduciary approach—including retaining full-time fiduciary investment managers, following best practices, and constant monitoring—is necessary to act in the best interest of the nonprofit or foundation.

Contact us for a complimentary needs assessment phone call.

Clint Patty, J.D.

As Managing Partner, Clint serves on the management team providing leadership, supporting business development efforts and providing client consultation.
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