Three Key Fiduciary Actions

While there are many answers to this question, I thought it might be helpful to highlight three simple actions that a nonprofit fiduciary can deploy in their efforts to avoid a disastrous outcome.

1. Consistent Review

The first action a fiduciary should take is Consistent Review. If the board has not structured an investment committee to oversee the funds entrusted to the organization, then it remains incumbent on the board itself to build time into its schedule for a systematic review process to help ensure that investments are performing in line with expectations and remain within policy parameters.

Following COVID, we have all become familiar with online meeting software like Zoom, Teams, Google Meet, etc. While I believe there is no complete substitute for in-person meetings, new technology can be harnessed to help fiduciaries consistently review their investment reports. Reports can be easily distributed utilizing applications like Boardable. Alternatively you can securely email them to committee members and share during an online meeting using just about any video conferencing system.

Implementing a consistent review process helps ensure that the organization is both conforming to long-term investment policy and proactively taking advantage of current opportunities. For example, the Federal Reserve has raised interest rates significantly over the last twelve months, and yet many organizations have been slow to move cash balances into interest-bearing accounts.

2. A Policy Driven Portfolio Structure

Both stock and bond markets have been challenging in 2023. Equity markets remain highly concentrated, and seven stocks (The Magnificent 7) have accounted for virtually all of the positive performance in broader equity indexes. Eliminating the impact of these seven stocks, we find that equity markets have remained virtually flat for the first ten months of the year. A Policy Driven approach protects the fiduciary from overreaction to such an event. When a small area of the market moves dramatically higher, it is tempting to change tactics and chase return.

Fiduciaries should utilize a Policy Driven approach that guides the investment committee’s decisions.

Unfortunately, most reactive investment decisions produce poor results! Fiduciaries should utilize a Policy Driven approach that guides the investment committee’s decisions. Policies for a given pool of assets should reflect the organization’s risk tolerance and objectives. The policy should have some flexibility and should allow for proactive engagement by either management or the committee but should also be restrictive enough to protect both the organization and the portfolio from a knee-jerk reaction.

In general, policies should comply with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) which, in its simplest form, highlights three elements the non-profit fiduciary should comply with or monitor. According to UPMIFA, fiduciaries should employ diversification, choose a sustainable distribution rate for endowment funds, and ensure that cost is reasonable.

3. Appropriate Risk Management

Finally, Risk Management, while always important for the nonprofit fiduciary, becomes essential in times of stress or uncertainty. Each organization has a different tolerance for risk! Risk tolerance is derived from both the financial ability to take risk and the organization’s willingness to take risk. An organization which has significant excess reserves or a longer-term portfolio like an endowment may have a greater ability to take risk, but either management or the board may be unwilling to accept a high degree of volatility as they seek to meet their objectives.

Each organization has a different tolerance for risk!

The last two years have witnessed substantial volatility in the bond market, an asset class that normally experiences low volatility. This recent high degree of volatility has, no doubt, caused many fiduciaries significant concern. This environment highlights the need for the investment fiduciary to carefully consider its willingness to take on risk perhaps even more so than its ability to avoid reacting to a negative market event and thereby compromising long-term objectives.

I believe striving for excellence as a fiduciary is an essential quality; a must for faith-based organizations. Consistent Review (either in person or virtual), a Policy Driven portfolio structure, and appropriate Risk Management are three best practices for your organization as you endeavor to be an excellent fiduciary.

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Bryan C. Taylor, CFA, is a frequent writer and speaker on investment management and the economy for the Christian nonprofit community. Bryan is a principal of Cornerstone Management, Inc. (cornerstonemgt.net) and serves as the firm’s CEO and CIO, providing direction and investment expertise to over 80 Christian nonprofit institutions.

Disclosure: Cornerstone Management, Inc. is a Registered Investment Advisory Firm. This article is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

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