Fiduciary Monitoring Helps Trustees Stay on Top of Their Game

Sep. 30, 2021

Non-profit fiduciaries have a duty of care to their organizations. Everyone knows they should be acting in the best interest of the organizations they serve. It’s the right thing to do. But do you and your board members realize that when it comes to financial matters, not only is ‘best interest’ the right thing to do, but it is legally required and, at times, must be provable?

Non-profit board members have an obligation as a ‘fiduciary’ to act in the best interest of their organization. Legally, this means they should act in the same manner as a “prudent person would in like circumstances”. This includes having a reasonable, fact-based process for making financial and investment decisions, grounded in careful analysis and investigation.

This realization often sparks the next, very common question of: How can this be easily done? After all, non-profits want to spend their time and energy on their mission, not paperwork or legal minutiae. Over the years, and in response to this exact problem, we’ve created and refined a fiduciary monitoring report (FMR) designed specifically to help board members make prudent decisions and evaluate them over time. For more, we spoke with Nick Cintineo, Senior Investment Consultant, and member of Manning & Napier’s Endowment & Foundation Services team, about what this report entails and how it helps board members meet their fiduciary duty of care.

What does an FMR do?

Nick: It’s a tool to make it easy for organizations to track their progress toward meeting their investment goals, as well as to determine if anything needs to change to stay on track for the future.

It’s different than a typical investment or custody report in that it goes beyond just reporting returns and holdings. That has its place too, but the FMR is intended to be more planning-oriented. It’s a great tool for board members to see their portfolio’s history, goals, and guidelines, all-in-one place, as well as to help maintain continuity as board membership changes. It can also provide a consolidated look at all of an organization’s investment accounts and portfolios, combined returns, combined allocations, etc.

What does an FMR typically include?

Nick: There’s three main parts, and the first section is a fiduciary checklist covering the core questions board members should be asking themselves. For example: Have cash flows been in-line with your policy? Is the asset allocation appropriate for where the market is today? Is the portfolio in compliance with its investment policy?

Then, there’s usually a few illustrations that show exactly how the portfolio and its withdrawals have progressed over time, how those results compare to expectations, and what sort of trajectory they might take in the future. We usually create a base case cash flow model that considers assumptions like withdrawals, contributions, returns, and volatility, and we can adjust that base case to test different assumptions.

Finally, there’s a reaffirmation of policies. I think this part is crucial because certain aspects of an investment policy, such as the priority of objectives and allocation guidelines, are some of the biggest factors determining the likelihood of success. In our reaffirmation process, we review all the core characteristics of a portfolio, such as time horizon, risk tolerance, and withdrawal needs; and we look at whether anything’s changed since the last report. Then, we come up with a recommendation for any adjustments that might be needed.

I really like this format because it lets us be proactive. We can identify issues and bring them to the board’s attention that would otherwise be hard to pick-up on a day-to-day basis. Inevitably, all these variables change over time, making an ongoing engagement and review the best solution for non-profits.

What about decision making? How does the FMR make that easier?

Nick: One thing we do for a lot of clients is test the impact of different decisions. For example, is the right spending target 4% or 5%? It’s easy to show the impact either scenario would have in the base case model, but we can also pair that assessment with a stress test and an overview of market history. What if a market correction occurs? How would the portfolio fare under the two different spending rates? How often does a correction happen, and how quickly might the portfolio recover? There’s no crystal ball to tell us the future, but we can give the board an idea of the range of possible outcomes, and they can then choose what they think most closely aligns with their goals.

How often do you recommend doing these reports?

Nick: Once per year is a good habit to get into, but we’ll do it more often if needed. If an organization has multiple managers and accounts, and if they are using this report to provide a consolidated look at everything, then it might make sense to do it more often. Also, if a board knows there’s been a substantial change to their needs or goals, it doesn’t hurt to assess that impact right away.

We’d like to thank Nick for taking the time to discuss the FMR report and how it can help non-profits. If you have any questions about your fiduciary duty of care or would like to take a closer look at our fiduciary monitoring report, please let us know. We’d be happy to help.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

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