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Fiduciary Responsibility: Risk from the Client's Perspective | Part 2 - The Mission of Institutional Investment Firms

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Fiduciary Responsibility: Risk from the Client's Perspective | Part 2 - The Mission of Institutional Investment Firms

Alex Serman • February 01, 2024



Fiduciary Responsibility: Risk from the Client's Perspective (Part 2)

“What is your purpose?” This is a fundamental question for every organization .

There are many useful and helpful things to be accomplished, but the practical reality is that these require money, time and resources. Since all of these are limited, it is critical to focus our efforts on the areas that matter most to us, and where we can be most effective. Essentially, we confirm “what” we want to accomplish before considering “how” we expect to get this done – and also how we expect to pay for this!

Too often, organizations put greater emphasis on the latter two activities, while giving less attention to defining the broader mission. We have also observed near-term issues taking the spotlight, presenting a risk that longer-term goals may take a back seat, bringing other risks to the organization. To counter this, we devote this article to focusing on the mission of institutional investment firms, establishing it as the second part of the hierarchy of responsibilities that stewards take on in their leadership role. In this paper, we add “Mission” to the foundation of “Fiduciary Responsibility” we presented in our first paper.


Each organization exists to provide financial support to a group of “beneficiaries” and it is these beneficiaries who define the organization. Sound backwards? Perhaps, but this is the perspective required of fiduciaries. After all, the duty of loyalty is rooted in an understanding of those whom the organization serves.

Let’s consider this breakout of beneficiaries and their supporting organizations:

  • Individuals and family units
  • Pensions
  • Endowments
  • Foundations

Each group has its own unique beneficiaries, and this causes the mission and goals of each to differ. We now introduce a distinction between the general purpose of the organization (mission) from the specific financial support that it provides to the beneficiaries (goals.) We begin to see the link emerging between the organization and its beneficiaries through identifying specific areas of need, and then providing ongoing financial support from the assets invested to meet these monetary goals over the long term.

Individuals are typically high-net-worth persons and families whose substantial assets support their “lifestyle” needs, often over many generations. These needs are not necessarily limited to “paying the bills” for daily life, but may also include charitable contributions and other “external” discretionary spending. For families with substantial wealth, these investments are multi-generational, and bring a number of complex factors into the mix of responsibilities for those managing these assets. These include tax management and inter-generational insurance and legacy planning (which may include private foundations established or supported by the family.) As such, these accounts sometimes exceed the size and complexity of the “institutional” accounts mentioned earlier.

Pensions are meant to provide a lifetime of payments to individuals during retirement. These include both Defined Benefit (“DB”) plans offered by employers to former employees, and Defined Contribution or self-directed IRA accounts owned by individuals. It’s worth noting that “DB” plans are offered by corporations and also by state and local governments, and are among the largest of the institutional investment accounts. These plans promise to provide ongoing payments, regardless of the ups-and-downs of the investment assets that are used to fund these payments. Many of these plans also provide a measure of inflation protection, so that the payments must increase over time. Both of these requirements present significant challenges in the management of these assets. This means that specifying the payment goals is perhaps the most significant factor for long-term success.

Endowments are unique in that they provide financial support for a single beneficiary organization. The most well-known endowments support colleges, but there are many hospitals, churches and other charitable endeavors that have been “endowed” with funds for their ongoing support. The original intent of endowments was to smooth out the budgeting and payment of near-term monetary needs. However, over time many organizations have come to depend on endowment support to pay for increasingly larger percentages of their operating budgets. This is a tremendous challenge in the management of these endowments.

Unlike pensions, the regular payments withdrawn from endowments are determined by the board of directors, who set a “spending rate” level that is felt to be prudent and sustainable in perpetuity. This brings in the idea of “intergenerational equity” as a responsibility of the organization’s leaders, so that the current generation of beneficiaries and future generations are treated equally. This is a matter of judgement, and it requires a degree of rigor (and some mathematics) and so we will treat this topic separately in a future article. As noted earlier, the sustainability of ongoing withdrawals is a key to the long-term success of every “spending” portfolio.

Foundations fall into two groups: public and private. These share a common goal: to support ongoing payments to a variety of causes and beneficiaries. These may be focused on a geography, or to a set of specific needs, or to both. It’s interesting to note that the largest foundations are private in nature, having been established by wealthy individuals. However, the majority of foundations are public in nature and are devoted to a wide variety of charitable purposes.

Both endowments and foundations face the same challenges with regard to providing support to their beneficiaries across generations. It should be noted that in recent years, a few sizable private foundations have been created with a mission to provide support over a finite horizon. When this occurs, any residual money would be given to another foundation for its work.

Like endowments, public foundations decide on their own “spending” level, while private foundations are required to spend at least a minimum level of five percent of their assets annually.


Given the substantial (and ever-changing) regulatory nature of pension management, and the complexity of estimating the liabilities they must finance, we will leave the remainder of this article to the charitable side of institutional investing. (We will address the challenges to pension investing in a separate series of articles.)

The challenges facing philanthropic organizations have proliferated substantially in recent years. Greater regulatory requirements and increased scrutiny, as well as meeting additional reporting requirements are producing greater operational strain. As a result, many organizations are having to “do more with less.”

A more challenging environment for donor development is being felt across the board, as the finances of individuals are increasingly strained. Research shows that donors maintain their willingness to contribute to non-profits, but are feeling less able to do so, given the challenges they see in the economy and the investment markets.

The need to establish - and sometimes adjust - goals while providing adequate governance and oversight have increased the responsibilities and the workloads of board members. For this reason, finding enough time to provide the leadership every organization needs has become one of the critical challenges facing today’s boards.

Within this more challenging operational environment, boards and their investment committees are facing
an equally challenging investment environment. These challenges include lower expected market returns with increasing levels of market volatility, increasing complexity of the investment process, and the need for adequate resources to manage the investment process effectively and holistically as part of the organization’s ability to accomplish its goals.


We believe that a holistic, goals-based approach to nonprofit investment management is essential to success in this volatile and ever-changing world we face. This requires tremendous resources, and must incorporate leadership, knowledge and experience in all aspects of the process.

The board must focus on its unique responsibilities of leadership, establishing the goals and overseeing the processes the organization puts in place to fulfill them. Given the increasing importance of the investment portfolio in funding the organization’s mission, and considering the challenging economic environment we face, many charitable organizations are moving toward a partnership with a third-party specialist who can employ this holistic, goals-based approach to investing. This frees the board to devote itself to its fiduciary leadership role, while delegating responsibility for the administration of its investments to the investment committee and its investment manager. This leaves the organization well-positioned to support its mission on an ongoing basis and to preserve the legacy of its stewardship across generations.

This requires investment firms to shift their focus from “beating benchmarks and peers” to accomplishing the organization’s goal of funding its beneficiary payments across all markets, while also preserving the value of its investment portfolio for future generations. This dual goal is quite challenging; it is also a new direction for many investment firms. But those investment firms that embrace this aspect of client-centered, fiduciary investing will become true partners with their clients in accomplishing the work of these organizations.

This all starts withseeing risk from the client’s perspective.”


So far, we our series of articles has examined:

  • the importance of the fiduciary
  • leadership in a holistic context of risk management from the organization’s perspective
  • establishing the organization’s mission and goals
  • the importance of partnership in funding the mission.

Our next installment will examine the process for establishing a sustainable spending target. As noted, this may be the most important factor in an organization’s long-term success.

Written in partnership with Stephen Campisi