DOL Rule Generates More Fiduciary Buzz Among Institutions

A best practice includes creating an appropriate investment policy.

Although a standard of care is already in place for institutions, via the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the coverage of the DOL fiduciary rule and related plan sponsor lawsuits in recent years have brought “renewed awareness” within the industry to improve fiduciary processes, according to Billy Lanter, fiduciary investment adviser at Lexington, Ky.-based Unified Trust Co.

“No institution wants to be a headline, as it relates to litigation, so the rule of a fiduciary is a much hotter topic today among foundations and endowments,” he says.

Institutional clients can uphold the UPMIFA standard of care and build donor trust by removing conflicts of interest, improving fund and asset quality, reducing fees and assessing concentration risk, he adds.

Of course, doing so is a process rather than an overnight fix. “Fiduciary education must be an ongoing commitment to the institutional culture, especially with board and staff turnover,” Lanter says.

A few best practices include creating an appropriate investment policy statement (IPS) that states the organization’s goals; regularly reviewing and benchmarking all investment fees; and establishing a definition of imprudent assets along with a process to dispose of them.

One of the most common mistakes institutions make in this regard, according to Lanter, is using multiple money managers without an effective or documented process to review investment management decisions.

“Delegating investment management decisions is fairly common, but when using multiple managers, the fiduciary duty of the organization is to ensure that each manager’s strategy is in concert with one another and consistent with the Investment Policy Statement,” he says. “This can be a rigorous process and institutions often don’t have a documented process to monitor this holistic type of review because they are simply unaware of this responsibility and how to manage it.”

He also suggests improving processes for selecting and evaluating an investment manager. It’s not just about fees and performance, but also about whether the manager can adhere to fiduciary best practices and implement and review the IPS.

And in the end, it all comes back to donor trust. “As anyone who has spent time soliciting donations will tell you, trust is at the core of any major gift,” Lanter says. “As a donor, how do I know my gift will be managed in a prudent manner, used to further the mission of the organization and is exposed to reasonable fees?”

By Corie Hengst