The Fiduciary Duty: A Guiding Light for Institutional Investment Trustees
Published on February 27, 2024, Investing in U.S. Financial History marks the culmination of a four-year journey into the annals of American financial history. Spanning from Alexander Hamilton’s groundbreaking financial policies in 1790 to the post-COVID-19 inflation in 2023, this book delves deep into the economic evolution of the United States. As the book promotion draws to a close, my focus shifts back to my other passion: advising institutional investment plan trustees.
Today, I draw insights from my book and over 12 years of experience as an investment consultant to shed light on five quotes that resonate deeply with the fiduciary responsibilities of trustees.
Quote 1: The Role of Prudence
“A trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purpose of the trust, and the skills of the trustee…Wasting beneficiaries’ money is imprudent.” —Uniform Prudent Investor Act (1994)
One of a trustee’s greatest assets is time, not the portfolios they oversee. With heavy reliance on advisors for investment decisions, trustees must weigh the cost-benefit of expensive investment options. The UPIA mandates a prudent evaluation of these costs, but often trustees overlook this duty. Reflecting on this quote before making significant financial decisions can serve as a safeguard against unnecessary financial waste.
Quote 2: The Illusion of Active Management
“More often (alas), the conclusions can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers in active management.” —Nobel Laureate William Sharpe (1991)
Despite evidence favoring passive management, investment consultants often push for active management strategies. The success of Nevada PERS by allocating predominantly to index funds underscores the fallacy of active management. Trustees should question the sustainability of such strategies unless backed by credible evidence.
Quote 3: Striving for Excellence
“You don’t want to be average; it’s not worth it…The question is ‘How do you get to first quartile?’ If you can’t, it doesn’t matter what the optimizer says about asset allocation.” —Allan S. Bufferd, former treasurer, MIT (2008)
Yale’s success under David Swensen’s leadership was not merely due to access to alternative assets but a unique culture of talent and governance. Trustees should assess their capabilities before venturing into complex investments to avoid mediocrity.
Quote 4: The Case for Simplicity
“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” —J. Pierpont Morgan
It’s essential for trustees to resist the temptation to follow peers and embrace low-cost index funds, a proven long-term strategy. Overcoming envy and focusing on prudent investment choices is crucial for fulfilling fiduciary duties.
