Fiduciary Duty

A fiduciary is anyone who has the legal responsibility of caring for someone else’s money. All foundation board members, as well as investment committee members, would generally be called fiduciaries.

Fiduciaries do not have the legal responsibility of hitting home runs with the investments under their care; there is no "target" of 6 or 8% annual return that you need to meet. The law does require, however, that fiduciaries be well-informed about the assets as well as follow a prudent process in caring for the assets entrusted to them.

Learn who has fiduciary duty (includes chart)

Investment Practices to Avoid

  • Not adhering to the investment policy statement. This is one of the most common mistakes cited by investment advisors to foundations.
  • Self-dealing. Foundation insiders cannot direct investment decisions and/or revenues to self, relatives, close friends or colleagues.
  • Paying a family member to serve as an investment advisor. Doing so makes it very difficult for the board to be objective on fees and performance measures, and often results in the board being less willing to make changes when necessary.
  • Being too narrow with asset allocation strategy. This often occurs due to a lack of understanding and familiarity with certain asset classes and investments.
  • Investing at modest levels in vehicles that create unrelated business income tax (UBIT). Alternative investments such as hedge funds are increasingly being marketed to private foundations and the use of these funds complicates foundation tax returns and can create additional tax liability for the foundation. The foundation should be sure before investing that the return on investment will make up for the increased tax liability.
  • Investing too much in illiquid private placements. Stocks which are not liquid carry a significantly higher level of risk, and are often inappropriate for small foundation investors.
  • Investing small amounts in complicated investments. Conservative foundation boards often receive a great deal of pressure from their advisors – and from the investment media – to “get their feet wet” in more aggressive investments that have a potential for big returns (with associated high risk). This often increases accounting fees and time required for oversight, with little chance of significant returns due to the small amounts invested.
  • Tragedy of the commons (or "death by committee"). This can occur when the board is hesitant to make important decisions for fear of rocking the boat or offending/disagreeing with a key stakeholder.
  • Low standards. Accepting poor service and/or poor guidance.
  • Poor accountability. The foundation fails to hold its advisors (brokers, money managers, trust officers, etc.) accountable. In these cases, the foundation officers generally fail to hold themselves accountable as well.

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Uniform Prudent Management of Institutional Funds (UPMIFA) 

Carol Kroch of Wilmington Trust explains UPMIFA:

“The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was adopted by the National Conference of Commissioners on Uniform State Laws in 2006. As of the fall of 2012, it has been enacted in 49 states, the District of Columbia, and the U.S. Virgin Islands. Only Pennsylvania and Puerto Rico have not yet introduced the legislation. UPMIFA provides much needed flexibility on endowment spending for charities and easier and clearer rules for managing and investing charitable funds.”

UPMIFA replaced the original act (passed in 1972) and explains how fiduciaries (all foundation trustees and investment committee members) are required to make decisions.

Read about UPMIFA and what changed in 2012