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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Non-Profits Get Their Day (Part 5) |
| by
W. Scott Simon
| 01-04-07 |
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I described, in last month's column, the dominant approach used by many investment advisors in providing advice to fiduciaries responsible for the investment of non-profit assets. That approach, which I term "imprudent speculation," ensures that charitable assets are invested by those advisors in such a way as to favor their interests over those of charitable beneficiaries and the fiduciaries that are responsible for protecting them. This outcome is inevitable since the business model followed by such advisors legally requires it.
Many of the fiduciaries responsible for the investment of charitable assets think that this approach by which they receive investment advice is the only one open to them. That just isn't so. Another, but less-well-known approach, which I term "prudent investing," focuses on what's best for charitable beneficiaries of non-profits. My five-part series on non-profits will now conclude with an examination of this approach, which stands in stark contrast to that of imprudent speculators who focus on what's best for their own business model.
I've tried to show fiduciaries in my series on non-profits the importance of understanding the differences between these two very different approaches of providing investment advice to them. Many (perhaps most) may dismiss what I've tried to convey. It may be more difficult, however, to dismiss what The Panel on the Non-Profit Sector (convened by the Independent Sector) recommends: "Charitable organizations should work with their state legislatures to amend state laws to ensure that the prudent investor standard of care for investment decisions, as set forth in the Restatement of Trusts (Third) and the Uniform Prudent Investor Act, is made applicable to all charitable organizations, whether formed as trusts or corporations." These bodies of modern prudent fiduciary standards require ideally a legally sound, academically based and cost efficient investment process. A prudently investing advisor incorporates this process.
Prudence as a Legally Sound, Academically Based, and Cost-Efficient Investment Process
Prudence as process is one of the overarching themes emerging from the landmark reforms of American trust investment law that culminated in 2006 with publication of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The investment standards of modern prudent fiduciary investing, as set forth by UPMIFA, require fiduciaries of non-profits to establish and follow a prudent investment and management process. An investment advisor who engages in prudent investing provides advice to such fiduciaries through a process that ideally is legally sound, academically based, and cost efficient.
1. Legally Sound
A Fiduciary Mindset
The Prudent Investor. The legally sound aspect of the investment process followed by a prudently investing advisor focuses on what's best for the interests of charitable beneficiaries. Indeed, every body of fiduciary law requires placing the interests of beneficiaries first; that, after all, is the very essence of prudence. A prudently investing advisor legally assumes fiduciary status to the non-profit fiduciaries it advises and, by implication, their beneficiaries. Providing investment advice grounded firmly in the law is also beneficial to fiduciaries because they are assured of greater protection from liability. It's pretty difficult for a fiduciary to incur liability if it's focused first on doing what's prudent legally for its beneficiaries.
The Imprudent Speculator. An imprudently speculating investment advisor engages in its own kind of "process" in providing investment advice to fiduciaries of non-profits. That process, however, tends to have a focus on the advisor's business model in order to enrich the advisor, not on the protection of beneficiaries (and fiduciaries) of non-profit portfolios. Imprudently speculating advisors consciously choose a business model that won't allow them to be fiduciaries simply because they don't want to be fiduciaries. The typical result of this approach is a toxic brew of poor diversification and high costs--both of which damage return--as well as bad service, which is an inevitable consequence of the imprudent speculator's business model. Needless to say, none of this is in accord with a legally sound investment process.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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