Why don’t more nonprofits use online investing tools? Sharon Liebowitz has some ideas. Share yours in the comments.
Over the last few weeks, I was honored to speak at two financial technology conferences in New York. It was great to hear insights and trends from fellow industry leaders and panelists. Insightful technology executives are looking at the digital future and seeing the opportunity to create better financial services. These days, big banks are talking about using technology to remove inefficient and expensive processes. All areas of banking are being reinvented thru the smart use of technology. These “FinTech” innovations are skyrocketing.
During the past year more and more retail consumers have invested their personal assets and 401ks using new online platforms. The so-called ‘robo-advisors’ are not just making headway; they are now viewed as potential leaders. Individual investors are already benefiting from the low fees, low minimums, and solid returns these platforms offer. They are doing so because they understand that by saving on fees, they keep more of their investment earnings in their own pockets.
We’re not just talking about the ‘early adopters’ or the techno-savvy young. While lots of millennials signed on early, older, wealthier investors are jumping in — to the tune of over $20 billion in assets. After eight years, online investing is mainstream. And the established banks and brokers are part of the game.
Yet nonprofits have yet to benefit from this massive opportunity. Why? I spent a lot of time debating that question. Especially since many nonprofit board members are already using robo-advisors for their personal investments.
And then it hit me. The decision for a consumer to try online investing is a personal one. Made by one individual, or two max.
For nonprofits, the decision to try online investing is made by the board or the finance committee. That is, it’s a group decision.
And that is why the sound governance that BoardSource promotes is so important. BoardSource often reinforces that board members have a fiduciary responsibility to protect the financial assets of their organization.
But making a decision in a group often changes the way individuals approach risk. Especially when it comes to fear and responsibility and money. It sometimes makes people risk averse. Good governance should account for this.
I believe board members are genuinely concerned for the organizations they support. But often, when they make decisions about financial oversight, the group dynamic takes over. As a result, sometimes expensive is a proxy for quality, or a focus on fear and responsibility leads to choosing a known but less competitive offer.
What I’d love to see is for boards to simplify this discussion. Why can’t boards embrace the fear and focus on the pros and cons that new platforms can bring in terms of performance, cost, and service. Isn’t that the conservative approach?
How can boards do this?
First, board members should promote open, transparent conversations about investing. An easy way to start a dialogue is during the quarterly financial review. I have seen nonprofit managers effectively motivate their board simply by talking plainly about how much they are paying to banks and brokers. With the lack of transparency, people often don’t understand how fees are typically embedded in the product cost and how fees kill performance. Once they find this out, it is often an a-ha moment. Boards have also reacted well to learning about the better alternatives available today. In fact, I would not be surprised if someone on your board is already benefitting from a robo-advisor. If you have one, ask that board member to speak to the experience. Finally, be wary of board members who work in financial services. While they are financially savvy, at the end of the day they are still an insider and may fear change.
Second, review the investment policy. The key here is to pay particular attention to the connection between an organization’s operating needs and how it plans to invest its financial assets. Some key questions include: Does our stated risk match the actual risk we are taking in our investments? Do our investments generate enough income to support our needs? How do we set and adjust our spending policy? If the answers are unclear or inconsistent, it’s time to dive deeper.
Third, designate a champion on the board who’s not afraid to ask the tough questions. Remember, especially if your organization doesn’t have a full time CFO or finance director, or a financially savvy board member, it may have been some years since anyone took a close look. High-performing organizations will ask questions that challenge the status quo and compare it to what new platforms can bring in terms of performance, cost and service. How have our investments performed? What are we paying for advice? Do we understand products held? Does our financial advisor act as a fiduciary? Are there any conflicts of interest? Don’t allow any sacred cows.
As nonprofit leaders we need to take a stand and demand to benefit, like the average retail investor, from the latest in financial innovation, tools and techniques, including competitive low fees, automated asset allocation, low cost products such as index funds that track the major markets, and greater transparency. Simplicity, convenience, and clarity.
Taking advantage of a high-quality, low-cost solution is the right decision in today’s investing world. For a nonprofit, this is a sound investment strategy.
With more than $4 trillion in assets held by almost 2 million nonprofits across the US, there is much to gain for the sector — roughly $80 billion in fees annually that can be re-directed to people and communities. Let’s embrace the times!
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