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I posted this on Bogleheads and got some good suggestions. I welcome the comments and suggestions of the HD audience as well.
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I serve on the board of a large (60k members) non-profit. I am on the Finance Committee which, among other things, monitors our investments. We sold real estate in 2024 that doubled the size of our investment portfolio to $3M. We also requested proposals for investment advisory services and selected a firm to provide those services.
Our investment policy states that we need to establish a benchmark for our investments. Our stated target allocations are: equity 60%, fixed income 25%, and cash 15%. Without our input or approval, the adviser established benchmarks for our investments as follows:
Equity: Weight Index
LC Growth 10% Russell 1000 Growth
LC Value 16% Russell 1000 Value
Mid Cap 14% Russell Midcap
Small Cap 9% Russell 2000
Intl (Developed) 5% Morgan Stanley EAFE Index
Fixed Income 32% Bloomberg US Aggregate Bond Index
Cash Alternatives 14% Bloomberg T Bill Index
We have not restricted where the adviser invests our funds as long as they are in the range of our target allocations for equity, fixed income and cash. However, I believe that broad market indexes should be used as benchmarks, rather than breaking the equity down into so many categories. The adviser chose to allocate equity funds to these different market segments, not us. Also, we are not seeking alpha, just market returns.
I believe we should keep it simple and use one total US market index as a benchmark for equities. The adviser’s equity investments should be measured against the total US market. Since the adviser likes the Russell indexes, the Russell 3000 should do fine. I believe it covers about 98% of US investable stocks. I am open to an international equity benchmark, but the adviser only has 5% allocated to international.
The adviser’s income benchmark is fine. However, I am not sure about the cash benchmark. The adviser stated the t-bill index’s 2024 return was .6%. The current rate for a 3 month t-bill is 4.3%. Furthermore, I do not believe our cash needs are so liquid that we should be investing all of our cash in very short term t-bills.
We have several new members on our Finance Committee, so I am unsure of their expertise or understanding of investments. Historically, we have not had much investing expertise on this committee. We will discuss this issue at our next meeting. I would appreciate any feedback from this forum that will strengthen my arguments for better benchmarks.
Thanks for your help.
Jerry
Two points:
I wonder if there was an adequate discussion with the adviser. They appear to be employing a barbell strategy for the large stock portion, which some would say is a path toward higher returns. I realize your organization doesn’t care about higher than market returns, and also agree a broad index or two would likely be a better way achieve market returns. So I wonder how well the committee and the adviser understood what the ask was.
And since you do just want market returns, it’s easy to say you could probably do without the adviser in the first place. But, that’s only assuming the committee has discipline when the going gets tough, and which I realize may be a lot harder than picking a few broad index funds, with multiple individual views on risk etc. I wouldn’t pay someone to manage a few index funds for me, but I’m a private individual (couple), not a non-profit. I’d think hard before deciding not to have one in such a situation.
My questions which would be the same as if I were to hire an advisor:
1) Why hire an advisor? Is it required due to bylaws?
2) How much is the advisor paid?
3) What is the expense ratio of the funds the advisor has you in?
3) How much value is the advisor adding?
4) Is the return higher than the market return?
I feel that this may be a classic case that I read about all the time in finance. A case of the advisor complicating the portfolio to show that their services are needed and thus can justify their fees.
To quote Thoreau, “ Simplicity, Simplicity, Simplicity!”
Another question under the “How he gets paid” question: Does he get sales commissions for the funds he directs you too? If you’re looking to match the indices, then costs are everything – if he is incentivized through commissions to put you in higher cost funds then that’s a problem.
Good questions David.
Bylaws do not require us to use an adviser. We were already using one before when we had half the assets we now have due to the sale of real estate. My sense at the time was that an adviser was the preferred approach.
Our staff finance manager is already overworked and I think we need to avoid adding more responsibility to her work load.
The adviser gets .80% for AUM. There are fees on funds they hold. I do not recall what they are but they did not seem exhorbitant when I researched that last year.
I do not feel we are getting anything special from the adviser. I analyzed our returns over a multi year period, and they seemed in line with the major stock indexes.
Last year was complicated by getting a large infusion of cash mid year. They dollar cost averaged into the markets over several months. Based upon the limited data I have seen, they underperformed the market but I do not know if they annualized our returns.
Thanks.