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Acting as an Investment Steward: Rules of the Road for Nonprofit Board Members – Germaine Giani Weldon

Germaine Giani Weldon, AVL WealthCare, LLC, Gulfport, MS

When you are successful in business, many people admire you. Specifically, charities and nonprofits wish to harvest the same level of commitment and expertise that contributed to your success as a businessperson and apply it to their own organizations. They want your leadership abilities, organizational skills and contacts you have developed over the years.

For the most part, this system works. The list of board members on most civic groups typically includes a community’s top corporate executives and most successful entrepreneurs. These community leaders not only possess the skills to run their businesses but also give countless hours to making their communities better places to live.

The problem arises when it comes to managing the trusts and endowments of these nonprofits. Whereas business owners may be very successful in running their own businesses and enthusiastically share their knowledge for the benefit of civic groups, they may not have the specialized experience, knowledge or skills necessary to act as investment stewards.

Handling someone else’s money is not the same as handling one’s own, and many business owners do not even handle their own investments. Many board members delegate their personal investment decisions to a financial advisor. As board members, they are tasked with making key investment decisions that can directly influence the stability and reach of the organization. Additionally, endowments can be enticing targets for investment salespeople who care more about commissions than the actual mission of the endowment.

Fortunately, one need not be an investment expert to be a diligent and valuable investment steward. In many cases, simply asking the right questions can make a big difference. Here are some basic steps to ensure that assets will be invested in a way that supports the organization’s mission.

Develop an Investment Policy Statement (IPS). An IPS is a written document that spells out the purpose, goals and time horizon for investments and how the investments will be managed. It includes the types of assets that can be considered and the kind of risk associated with those assets. It can also include the specific asset allocation and the benchmark.

If an investment manager is used, the IPS can spell out the steps that will be taken to choose that manager. This is a key step. Too often boards simply turn over their endowments to a brokerage firm without any written guidelines as to how the money should be invested and monitored.

Define policies to prevent conflict of interests. Guarding against conflicts of interest is of particular importance when hiring an investment manager. Is the manager being hired for his or her skills and experience, or because he or she is a friend or relative? Boards who hire outside managers should follow a due diligence process to determine if the investment manager is properly licensed and meets their requirements. This process should be documented to protect the board, as well as the money manager, should any questions later surface as to why this person was hired.

According to Prudent Practices for Investment Stewards written by Fiduciary360 and reviewed by the American Institute of Certified Public Accountants, an investment steward should always ask who is benefiting most from a transaction. If it is anyone other than the nonprofit, there is probably a conflict of interest.

Ask several questions, especially about costs. Investment stewards must remember that they are managing someone else’s money, and they have a duty to donors to ensure that their money is being managed responsibly.

Mutual funds, investment managers and commissioned investment products all have fees associated with them that should be reviewed and questioned. It does not always mean that the lowest fee product must be chosen, but there must be justification and documentation as to why one service or product was chosen over another, especially when the fees are higher. Not spending the time to question how a fund is structured or how the fees are charged is a disservice to those who generously made donations.

If the nonprofit is part of a national association, study the investment guidelines established by the national group. Many national associations have designed investment policies and procedures to assure that local boards follow prudent investment practices. If guidance at the national level is not available, study fiduciary practices, and help educate fellow board members before making any investment decisions. Many boards have attorneys and accountants who have access to this information and would be willing to provide board development workshops. Booklets on fiduciary standards can be obtained through the Foundation for Fiduciary Studies at www.fi360.com/main/foundation.jsp.

Many board members are busy business people who give back to their communities by carving out a little time for civic organizations. It is important for them, as investment stewards, to learn prudent practices so they can protect their organizations’ assets and help achieve their goals.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2013, The BAM ALLIANCE

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Advisor, AVL WealthCare, Gulfport, MS

Germaine Giani Weldon, CPA/PFS, CFP® is an advisor for AVL Wealthcare, LLC, an independent member of the BAM ALLIANCE.

Germaine provides investment and financial planning advice to families and professional business owners. She has authored numerous articles for various news publications. Germaine has served for the CERTIFIED FINANCIAL PLANNERTM Board of Standards and the personal financial planning section of the American Institute of Certified Public Accountants.

Germaine holds a master’s degree from the University of Southern Mississippi and a bachelor’s degree from the University of Mississippi.

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