You’ve probably heard the adage, “No Risk, No Reward.” While I suppose there is always some level of risk in anything you do, taking on too much financial risk can lead to unwanted consequences. Foundations and endowments, or really anyone focused on the institutional space, must be particularly careful about the amount of risk needed to help their mission become a reality.
I reviewed a survey by CAPTRUST of 150+ foundation and endowments with less than $50 million of investible assets. The survey questioned how much risk the foundation/endowment was willing to take to get their target return. The answer: too much!
The survey showed that most foundations/endowments are taking on more risk than they would like. There was also a personnel-related risk as the majority surveyed had only one staff member (full-time or part-time) focusing on investments with most relying on financial institutions for advice. While it’s always recommended to leverage an expert when needed, it’s important to note that unless they have agreed to assume fiduciary liability in writing, you are still held liable for the decisions being made. Why is that a concern? Let’s take a deeper dive.
You may already be familiar with fi360, an organization dedicated to the development of fiduciary best practices. Fi360 uses a four-step process in the Prudent Practices for Investment Stewards (this would be board members, trustees, investment committee members, attorneys, accountants, institutional investors and anyone else who is involved in overseeing investment decision-making). The four-step prudent process is laid out as:
Sounds easy, right? Allow me to further complicate things. Within each step, there are multiple practices. Within those practices, there are multiple responsibilities. Institutional boards have the fiduciary responsibility to fulfill all responsibilities under each practice of each step. Want to guess how many total responsibilities there are? 10? 20? 50? The answer: 140! I can’t make this stuff up! If you want the full list, reach out and I’d be happy to review it with you.
Getting back to the topic at hand, how is one board, let alone one person, supposed to manage all those responsibilities on an ongoing basis?
If this is you or someone you know, you may be asking yourself several questions. What are all these responsibilities that I am supposed to be fulfilling? How am I supposed to manage all of these on an ongoing basis? What happens if I’m not doing all these things? How can I offload some of these responsibilities so I’m not having to do this alone?
You have a choice: you can try to manage all those responsibilities on your own, hope you are doing it correctly and risk personal liability for breaches; you could work with a financial advisory firm (you are still held liable for any breaches that may occur); or you can hire a discretionary trustee to manage the responsibilities for you. When you work with a discretionary trustee, your fiduciary responsibility for your investments is limited to being prudent in hiring and monitoring that trustee.
At Unified Trust, we even make that easy. We take full fiduciary responsibility (in writing) for the first three steps (organize, formalize, and implement) regarding your investments. All that is left for you is to be prudent in hiring and monitoring us and we provide you with a quarterly monitoring report to make that easy.
Feeling that sigh of relief yet?
Board members have an immense amouunt of responsibility in overseeing the mission and success of the foundation/endowment. Among those responsibilities is knowing and understanding how much risk the foundation is willing to take to achieve the targeted reward. At American Trust, our mission is to help build financial futures in the interest of others. We go through a risk tolerance process with each of our clients to make sure they are taking the right amount of risk to achieve their financial goals. We would be honored to serve as your trusted fiduciary so you can focus on your mission at hand and achieve the foundation's financial goals.