Why your Non-Profit Should NOT Go “DIY”
Practical reasons why your non-profit’s investment committee should not plan to “do-it-yourself” with investing.
Late last year, I came across an article in the New York Times that was highly irresponsible. It had the innocent sounding headline “Simple Investing For Non-Profits” and offered a seemingly reasonable approach – instead of hiring a professional to invest, have the investment committee pick a couple of index funds and rebalance around a target allocation.
The problem is that suggesting an investment committee should run their own “set-it and forget it” investment program is actually terrible advice. As someone who makes a living by advising families and institutions on how to properly handle and invest money, I know my opinion is biased. So take that as my conflict-of-interest disclosure if you will, but regardless, this needs to be addressed. Boards of non-profit organizations should not have their investment committees self-managing their investment portfolios. It is a dangerous policy to have and here are three important reasons why:
Many people have great intentions to serve their communities by joining boards and investment committees, but too many of them overlook the huge liability they are taking by doing so. Being the steward of a large pool of assets is a serious responsibility. Board members are held to a “Prudent Person” rule and therefore, when it comes to decisions on the organization’s funds, must act in a way that most people would deem prudent.
If the bottom falls out of the market and losses stack up in a fund over which you are a steward, a stakeholder could come back and ask “if your committee does not have significant institutional investing experience, why didn’t you a hire a professional?” Volunteers, who are just trying to do the right thing, could be held personally liable.
Hiring a professional to manage your organization’s funds can reduce (not eliminate) this risk of liability. If you do your due-diligence and maintain oversight over a qualified manager, it would be hard to argue that that was not a ‘prudent’ process. Investment committee members should seek out a qualified investment manager who will be willing to serve as a ‘fiduciary’ meaning that they are legally obligated to act in the best interest of the organization
Great advice is not impossible to find.
The article also argues that if your organization does not have over $50 million in investable assets, you won’t be able to find quality advice. I cannot disagree more. I have met many great advisors who do excellent work for organizations that have less than $1 million in assets. I have managed money for endowments and foundations ranging from $20 million to $20 thousand and have served on boards and investment committees where we had quality institutional management reporting to us and found that it was worthwhile.
The professionals quoted in the article are all from very large institutional investment firms and manage clients in the $50 million range. They have a business model that is not designed for the majority of organizations out there, which fall well below that threshold. That is why they just throw up their hands and say “Just put those little guys into index funds and call it a day. We can’t waste time talking to them.”
However, there are countless great advisors and investment managers who concentrate on advising organizations who have anywhere from $100,000 to a few million in assets and do a great job at it.
Circumstances can change.
Remember that board and committee members are volunteers, and even the highly sophisticated ones have day jobs. It is not one of their top priorities to watch over the investment portfolio on a daily basis. Markets can swing fast, risk profiles can change, and portfolios will need to be adjusted. But, if there is no-one paying attention, these details can be missed.
What if a large portion of the funds needed to be used for an upcoming capital improvement? What if a major funding source was cut-off, increasing dependency on the investment portfolio for support? What if a potential donor inquired about making a large gift and wanted to know how it was invested? It could be that there is someone on the board who is sophisticated enough to be able to navigate this kind of changing landscape, but will there always be? The problem with investing during good times is that it can be a little like highway hypnosis – the market continues to do well, the portfolio increases in value, and the diligence can get sleepy. It is better to have someone paid to be at the wheel for the time when the landscape suddenly changes.
Finally, just remember that being the steward of a large pool of assets meant to help support a non-profit or mission-based organization is a very serious responsibility. You should think of it the same way you think about health. It can be fine for someone to decide they don’t need to see a doctor themselves but if they have the legal responsibility for someone else’s health, you would expect that they would consult a medical professional and not just wing-it themselves.
When it comes to money intended to benefit a cause you believe in, it’s better to be safe than sorry.
Keith J. Akre, CFA, CFP® – Trust Officer
Opinions expressed are solely my own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Asset Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.