When an institutional investor considers the role of a fiduciary with their strategic partners, specifically those managing their endowments, it is imperative to understand the roles and responsibilities of each partner in the relationship. It is always worth starting with a basic definition…
An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.
In considering this definition further, a fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by the institution is actually accepted by the other party or partner entering into the relationship. The duties of a fiduciary include loyalty and reasonable care of the assets they are being trusted to invest. All of the actions of the partner are performed for the advantage of the beneficiary. Mere respect for the institution’s judgment or general trust in their character is ordinarily insufficient for the creation of a fiduciary relationship.
When choosing a strategic partner to invest your foundation’s endowment, a fiduciary relationship will be critical to your organization’s success; however, it is important to note that an institution’s board can never fully give up their fiduciary responsibility to the advisor they may be hiring. They can and should require their advisor to become a co-fiduciary.
Along those same lines, it is important to recognize that the strategic partner is subject to the same rules under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) (now approved by all states within the U.S.).
UPMIFA provides statutory guidelines for management, investment, and expenditure of endowment funds held by charitable institutions. Commentary included in section three of UPMIFA notes that “the duty of care, the duty to minimize costs, and the duty to investigate [are] mandatory.”
Duty of Care
UPMIFA’s duty of care, which is derived from non-profit corporation law, incorporates the elements of care, skill and caution which together comprise the very definition of prudence under the Restatement and UPIA.
Duty to Minimize Costs
The duty to minimize costs is described in UPMIFA section 3(c)(1) (which tracks the language of UPIA The Rules for Non-Profit-Portfolio Fiduciaries): “In managing and investing an institutional fund, an institution may incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution.”
Duty to Investigate
The duty to investigate is described in UPMIFA section 3(c)(2) (which tracks the language of UPIA section 2(d)): “[A]n institution shall make a reasonable effort to verify facts relevant to the management and investment of the fund.” Commentary to section 3 of UPMIFA notes, in part: “subsection [3(c)(2)] requires persons who make investment and management decisions to investigate the accuracy of the information used in making decisions.” Commentary to UPIA notes that a fiduciary has a responsibility “to examine information likely to bear importantly on the value or the security of an investment.”
How does an Institution Understand a Potential Partner’s Interpretation of Fiduciary?
The best way for an institution to understand a potential partner’s interpretation of Fiduciary is upon issuing a Request for Proposal (RFP). It is interesting to note, of the RFP’s received by Beacon Pointe Advisors, very few institutions will ask questions specific to understanding the responding parties’ role as a fiduciary. We believe institutions should ask specifically if the responding party will act as a co-fiduciary in their relationship. They should further ask if they will acknowledge their role as a fiduciary and list the activities they will engage in this capacity. Institutions will want to gain as much understanding early in their process when considering an organization to partner with in the management of their endowment. Each respondent will view fiduciary from their perspective and those roles and responsibilities may not be consistent with the institution’s needs.
An Investment Advisor is Key. Why?
Investment Advisors are governed by a fiduciary standard.
An SEC Staff Study further explains:
“An investment advisor is a fiduciary whose duty is to serve the best interests of its clients, including an obligation not to subordinate clients’ interests to its own. Included in the fiduciary standard are the duties of loyalty and care.”
Advisors also have a duty to manage conflicts of interest. An advisor that has a material conflict of interest must either eliminate that conflict or fully disclose to its clients all material facts relating to the conflict. An example of a conflict of interest relates to fees. Although there may be some exceptions, advisors typically structure their charges as an asset-based fee. Whereas commission-based fees provide an incentive to execute trades that may not be in the client’s best interest, asset-based fees eliminate this conflict of interest and provide an alignment of goals: If the client’s portfolio falls in value, so will the advisor’s fees.
Beacon Pointe Institutional Consultants can be contacted at firstname.lastname@example.org
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
 Definition of Fiduciary: http://dictionary.reference.com/browse/fiduciary?s=t
 Simon, Scott W. The Rules for Non-Profit-Portfolio Fiduciaries, Morningstar Advisor. January 7th, 2010.
 Bromelkamp, David J. Senior Consultant – The Voice of the Investment Management Consultant. Volume 7, No. 5. PCT Publishing, 2004.
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