A Higher Calling

Are you associated with a not-for-profit organization? Maybe you volunteer some of your time for a cause about which you feel strongly. If you don’t do something along these lines currently, you may very well find yourself in this position in the future. Save this column for that time as it can help you understand the great responsibility that comes with stewardship.

Investors all too often make emotional mistakes when investing their money, a topic that is a staple of this blog. Truly terrifying is when I encounter a pool of money that belongs to no one in particular, but represents the donations of numerous persons in furtherance of a specific cause or goal.

Philanthropy is a wonderful thing. It is an expression of the generosity of the human spirit. When money is donated, it ends up in one of two places. A cash account intended to fund current activities/operations or an investment (or “trust”) account intended to provide some income to fund current and future activities while the corpus lives on in perpetuity. Needless to say there are rules and guidelines when managing pools of other people’s money. This blog is not intended to get into the mundane details of portfolio and trust management but I will suggest an excellent book for those who wish to delve more deeply into the topic. The Prudent Investor Act, A Guide To Understanding by Scott Simon is a great handbook on how to do this the right way. Here are the high points:

1.       Have a written Investment Policy Statement detailing the investment allocation; the time horizon(s) for using the money; discussion of risk tolerance; allowed and disallowed investments; details on how and why allocation changes are made.

2.       The level of diversification is perhaps the most important investment decision you will make.

3.       Have suitable process for choosing a financial advisor and investment managers.

4.       A fee discussion (what’s prudent in the market place for this size account and scope of work).

5.       Written understanding of the obligations of a fiduciary.


There are two principle reasons for following this fiduciary process (The Prudent Investor approach). First, it’s a road map to investing other people’s money that avoids common mistakes made by individual investors. Second, it provides a process that helps insulate the fiduciaries or board members from accusations of malfeasance when markets decline. This is not intended to be legal advice but markets will always decline, sometimes precipitously, and there is usually someone that questions a board’s decisions after the fact. Having a well written investment policy statement and implementing clear processes goes a long way to protect those who have volunteered to be stewards of this capital.

Lastly, here are some investing “Do nots” when you join a board of a non-profit.

1.       Do not hire a financial advisor because they are a friend of another board member.

2.       No member of the board should take on this duty themselves unless they are clearly qualified and they forego compensation.

3.       Financial advisors or investment managers shouldn’t be expected to contribute to the non-profit as a condition of being hired.

4.       No gifts or favors of any kind can be accepted by board members from advisors and managers.

5.       Don’t speculate! Educate board members on the difference between investing and speculating. The latter has received a bad rap at times and that shouldn’t be the case. Speculators in financial markets serve in a very valuable role. They provide liquidity for the rest of investors. But we are discussing stewardship and the prudent investment of other people’s money. Therefore, the above guidelines should be adhered to. To simplify the distinction between the two, speculate with money you can afford to lose.

Successful investing requires discipline and patience. Investing on behalf of others requires an additional layer of prudence and responsibility. Done correctly, it should allow volunteers to focus on the mission at hand and reduce the stress that often accompanies financial decisions.