Best Practices for Trusts, Foundations, and Endowments

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Best Practices for Trusts, Foundations, and Endowments

If you have been asked to serve as a board member or trustee for a non-profit organization, feeling honored is a natural response but a terrible reason for saying yes to the job. Your role as committee member, board member, or trustee will likely designate you as a fiduciary, a role with specific legal responsibilities.

The Center for Fiduciary Studies defines a fiduciary as anyone who has the legal responsibility for managing the property for the benefit of another, exercises discretionary authority or control over assets, and acts in a professional capacity of trust rendering comprehensive and continuous investment advice.

Although the lines around the term fiduciary are blurry to say the least, what remains clear is the fact that the term “fiduciary” encompasses a wide group of people and holds them to the highest ethical standards. In some cases, fiduciaries can be held personally liable for the negative repercussions precipitated by poor decisions.

Your primary duty as a fiduciary is to act in the best interest of the trust, foundation, or charity. Beyond that, your specific fiduciary obligations are dependent on a variety of factors. Determining the exact classification of your non-profit among your state’s taxonomy of public charities and private foundations is a good first step. There are, however, some responsibilities common to all fiduciaries.

While no simple checklist can fully spell-out the fiduciary duties for each non-profit organization, the following is a series of best practices any charitable organization or foundation would be well-advised to consider. Because much of the day-to-day asset management falls on the shoulders of the investment committee, the following list is targeted primarily to ensure they fulfill their fiduciary responsibilities.

Set Investment Committee Operating Procedures.

At the heart of any non-profit organization should be an investment committee, a team of fiduciaries specifically tasked to oversee the foundation’s assets.

  • Develop an Investment Committee Operating Policy which outlines member requirements, attendance, voting procedures, reporting, etc.
  • Establish communication and reporting protocol between Investment Committee, third parties, and the Board.

Develop an Investment Policy.

The Investment Policy Statement (IPS) should serve as the game plan which drives all your investment decisions. If necessary, contract with other “prudent experts” such as investment advisors and investment managers who can assist you in developing and implementing your investment policy.

  • Contract with “prudent experts,” such as investment advisor(s) and investment manager(s), if necessary.
  • Write an Investment Policy Statement, including expected return, time horizon, risk tolerance, spending policy, and asset allocation strategy consistent with organization’s mission and with Internal Revenue Code requirements.
  • Include benchmarks for evaluating performance of investment advisors and investment managers.
  • Submit the IPS for Board approval.

Implement and document adherence to policies.

Earning big investment returns year-to-year or eliminating risk does not necessarily mean you are fulfilling your fiduciary duty. The implementation of a prudent investment policy is as important as the investment policies themselves. In other words, it is not how many points you scored in the game, but whether you are successfully implementing the game plan. Carefully document your actions to provide an account of due process.

  • Diversify assets to specific risk/return profile according to the IPS.
  • Avoid self-dealing, conflicts of interest, and prohibited transactions.
  • Keep detailed records documenting the establishment of process and adherence to policy guidelines. Your records should include copies of the IPS, meeting minutes, policy decisions, investment performance reports, investment applications/forms, contracts with third parties, ADVs or descriptive brochures of all investment advisors contracted with the foundation, and all other Investment Committee memoranda and communication. Keep copies of articles of incorporation, by-laws, and/or trust agreements.

Monitor and Review.

Once the IPS is in place, the Investment Committee must remain actively involved. Even if a committee has contracted with “prudent experts,” the Committee never delegates its fiduciary responsibility. Ongoing supervision and review is essential. The Committee should see that prudent investment practice is followed and should monitor both the investments and investment advisor(s).

  • Monitor investment practice to ensure prudent investment practice guidelines are followed as stated in the IPS.
  • Monitor the performance of investment advisor(s) and other “prudent experts.”
  • Receive and review quarterly investment reports from the investment advisor(s). Quarterly reports should be AIMR-compliant and include time-weighted returns.
  • Control and account for investment expenses and contributions.
  • Review IPS annually.

Promote transparency and accountability.

The foundation should promote transparency among its members and comply with state reporting standards.

  • Investment Committee reports to the Board, as directed.
  • File IRS Form 990-PF or Form 990 annually.
  • Be prepared for public inspection of key documents including: Application for tax exempt status (Form 1023) along with all other IRS communications and Form 990 or Form 990-PF. Provide copies upon request.

No list can fully spell-out the important fiduciary responsibilities of board members and trustees. For that reason, it is imperative to retain good council. Additional resources are available from the Council on Foundations and the Center for Fiduciary Studies.

The original version of this article was published May 15, 2006. Photo used here under Flickr Creative Commons.

Follow Beth Nedelisky:

Wealth Manager, CFA, CFP®

Beth Nedelisky is part of the Investment Committee at Marotta Wealth Management and specializes in trust and endowment management. Born in Africa, raised in Europe and married in the USA, Beth understands world markets first hand.