“One of the most important decisions the Investment Steward has to oversee is the determination of the portfolio’s time horizon.” Center for Fiduciary Studies
As a leading resource and standards-setting body for investment fiduciaries, The Center for Fiduciary Studies recommends that the first step in the formalization of an institutional investment program is that of determining the portfolio’s time horizon. As Board members of foundations, endowments and not-for-profits (“FENP”), we typically serve in that role for a brief season in the perpetual lives of these organizations. These seasons are most commonly defined either by “term limits” as mandated by our Board charters or self-imposed limits as we often choose to “move on” to other organizations as our interests evolve. Meanwhile, we are legally bound by a duty of loyalty and prudence as prescribed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). We are compelled to apply our investment expertise and experiences to a process that is designed to address the long-term objectives and time horizon of the institutions we serve - even when this pursuit is contrary to the manner in which we manage our personal investments.
Practically speaking, our personal investment time horizons reflect our life expectancy, with seasons of accumulation and distribution along the way. We have sole and ongoing responsibility for our investments and we (and our families) generally reap the benefits and bear the burdens of our investment results. We have ultimate responsibility for our financial “finite future.”
Most fiduciaries, on the other hand, serve as Board Members of foundations, endowments and not-for-profit organizations that face an “infinite future.” These organizations hope to and are expected to operate in perpetuity. Fiduciaries must balance the need to provide vital support for the organization’s programs, projects, missions and ministries in the near-term while ensuring long term sustainability of the organization and maintaining its long-term purchasing power.
As Board Members and Investment Committee Members acknowledge the implications of this “balancing act” in the context of a perpetual time horizon, we confront a particularly challenging dilemma. While experience and research have yet to yield a comprehensive set of best practices that can be uniformly applied to the oversight of FENP portfolios in a fail-safe manner, it does appear that the investment programs we oversee can benefit from conscious and deliberate efforts to ensure good stewardship that is designed to acknowledge the importance of investing for an “infinite future.”
To that end, a series of questions to prompt discussion and consideration might include:
- Has our organization established a structure and the related governance framework that clearly defines responsibility, authority and accountability for the design, implementation and oversight of a long-term investment program?
- If we have “term limits” for Board members, how does our structure and governance framework ensure long-term consistency in our investment program?
- In recruiting Board members and appointing them to the Investment Committee, has the Board been deliberate in identifying fiduciaries who have technical expertise in investments, a fiduciary temperament and a passion for the mission of the organization?
- Does the organization have a clearly defined and consistently applied process for Board and Investment Committee orientation and ongoing education?
- Is the Investment Policy designed with a long-term perspective while acknowledging the dependency of the programs, projects, missions and ministries on its results?
- Does the Investment Policy clearly define the long-term and short-term investment return objectives and risk tolerances of the organization rather than the personal preferences of the Board members?
- Has the Board defined the process for selection, monitoring and retention of investment advisors and investment consultants in a manner that can be applied over a long term horizon?
Investing with an infinite time horizon does not come naturally to most of us. That’s just not the way we are naturally wired. Policy, process, governance, context, temperament and culture are critical components of our fiduciary investment decision-making and oversight process. Our work with the ClearView Fiduciary Alliance is focused on helping fiduciaries acknowledge these and other challenges. Our hope is that by being better informed and educated, they will be better stewards.
To learn more about the ClearView Fiduciary Alliance, please contact:
Larry D. Coats, Jr.
Larry D. Coats, Jr. is President and CEO of ClearView by KDI, LLC, the sponsor of the ClearView Fiduciary Alliance. With three decades of investment industry experience, Larry has served as a Board member and on the Investment Committees of multiple foundations and endowments and has also served as a Trustee for an SEC-registered mutual fund.
About ClearView – The ClearView Fiduciary Alliance is a membership-based service of ClearView by KDI, LLC. ClearView’s mission is “to help foundation, endowment and not-for-profit Boards and Executives make better investment decisions” by being more informed and better educated. ClearView is not an investment adviser and it does not provide investment management services. It is a resource for Executives and Board members who are focused on being better investment fiduciaries. Its core offering is a robust, web-based system that provides its Members with independent, objective and confidential quarterly peer investment performance and portfolio allocation analysis specifically targeted to small and mid-size foundations, endowments and not-for-profit organizations. With a base of more than 35 regional Members (representing more than $1.1 billion) and a database of nearly 800 similar portfolios from across the country, ClearView is uniquely positioned to help Boards and Investment Committees understand and analyze their investment programs and the results of their investment advisers and consultants.
Copyright ClearView by KDI, LLC/ClearView Fiduciary Alliance (August 11, 2016)