For Nonprofits, there are three.
By Kathleen McBride, AIF™, AIFA®, CEFEX Analyst®
Now that we’ve surprised some nonprofit leaders who may not have realized that they are Lay Fiduciaries™[1], (please see “Are you a Fiduciary?”) let’s talk about other types of fiduciaries that can help you manage your own role as a Lay Fiduciary.
Lay Fiduciaries are members of a nonprofit’s board, trustees, executives and other decision-makers who are not professional investment fiduciaries.
Lay Fiduciaries are responsible for the management of the nonprofit’s investment assets – even though most are not investment professionals and have had no, or very little, training about investments. The investment assets are the money from donations and endowment(s) that the nonprofit has received to fund operations and/or programs.
Lay Fiduciaries are also known as Investment Stewards – and are tasked with taking care of the nonprofit’s investment assets as carefully as if that money were their own, for the benefit of the nonprofit’s mission beneficiaries. Lay Fiduciaries can prudently select Professional Fiduciaries and can even delegate some fiduciary responsibilities to Professional Fiduciaries. To do so, Lay Fiduciaries need to prudently select the Professional Fiduciaries, and in writing, delegate discretionary authority to the Professional Fiduciaries to take on certain fiduciary roles and certain actions on behalf of the nonprofit’s beneficiaries. Lay Fiduciaries keep the oversight and monitoring roles.
Registered Investment Advisors are Professional Fiduciaries, whose job is to provide advice to nonprofit Lay Fiduciaries about how to invest the assets to achieve the amount of long-term growth necessary, at an acceptable rate of risk, to fund the operations and/or programs. The asset money will be invested in different types of investments – a portfolio. Think of a portfolio as a basket of stocks, bonds, and cash.
Before the investment decisions are made, the Registered Investment Advisor (RIA) will typically help the Lay Fiduciaries determine goals and objectives, the time horizon(s) – what’s the money needed for, and how long until the money will be needed. They will discuss investment risks and potential investment returns – growth or loss over various time periods and risk levels, and diversification – not putting all the investment “eggs” in one basket.
They will also discuss objective, measurable due diligence criteria for selecting and monitoring the investments. This helps to create a disciplined process for monitoring/reviewing how the whole portfolio is performing, and whether each investment is performing as expected – or whether adjustments are needed.
The RIA will help the nonprofit to create an Investment Policy Statement (IPS), and an Asset Allocation – how to divide up the assets among different types of investments, to achieve an expected risk level (how much turbulence), and rate of return (growth/loss over various time periods). Investment growth is never straight up, it’s bouncy, so it’s important to know what to expect). Some nonprofits delegate authority and discretion to Registered Investment Advisors to select Investment Managers, another type of professional fiduciary.
Investment Managers are another type of professional fiduciary who are given discretion to manage the assets. One example of an Investment Manager is a mutual fund manager. Mutual funds are pools of stocks, bonds, and some cash that are professionally managed by an Investment Manager. They trade on stock exchanges and are priced once every weekday.
When a nonprofit delegates authority to a Registered Investment Advisor, and the RIA is given discretion – the authority to select Investment Managers, such as mutual funds, and monitor the managers and make changes when necessary, this can – if done correctly – lift considerable fiduciary responsibilities from the Lay Fiduciary’s shoulders.
Lay Fiduciaries always retain the oversight and monitoring fiduciary responsibilities – even if they have delegated certain roles and responsibilities to the professional fiduciaries. This is not “set it and forget it!” But lifting the burden of some of the fiduciary responsibilities is significant – and hiring prudent experts to help manage the assets is prudent for Lay Fiduciaries.
Learn more on April 21, 2022, here and register for 15 Ways to Enhance Donor Trust by Improving Your Investment Stewardship!
FiduciaryPath™ trains and consults with Lay Fiduciaries to help them understand and fulfill their fiduciary roles, increase value from service providers, and attract more donors and gifts.
Kate McBride is President of FiduciaryPath™, LLC. She is also a Founder of the Center for Board Certified Fiduciaries™, (CBCF™), which is affiliated with the Wake Forest University School of Professional Studies, and a Specialty Leader and an author of its Foundations & Endowments curriculum. She is a Board Certified Fiduciary™, (BCF™), an Accredited Investment Fiduciary Analyst® (AIFA®), and a CEFEX Analyst® with the Centre for Fiduciary Excellence. For more please contact kmcbride@fiduciarypath.com.
[1] [1] “Where are the Lay Fiduciaries Who Have Responsibility for More Than $26 Trillion of US Investment Assets? By Allan Henriques, Kathleen McBride, David J. Bromelkamp, Trevor Merrill, and Tony A. Michael. Published by the Center for Board Certified Fiduciaries™.
