In today's complex and competitive capital marketplace, fiduciaries must make timely and accurate decisions in selecting, monitoring and evaluating investment advisors to mitigate risk and protect consumers.

With the increasing need for transparency and accountability, many fiduciaries delegate investment authority to fee-only fiduciary investment advisors. In this article, we'll explore the importance of adhering to the Uniform Prudent Investors Act (UPIA) when selecting an advisor. It will also outline key principles fiduciaries should consider in the decision-making process.

Understanding the Uniform Prudent Investors Act (UPIA)

Established in 1994, the UPIA provides a framework for fiduciaries managing investments on behalf of beneficiaries. The act incorporates modern portfolio theory (MPT) as a guiding principle for investment decision-making. According to this legislation, fiduciaries can delegate investment and management functions — subject to specific safeguards.

The act holds even more significance for fiduciaries acting on behalf of special needs beneficiaries, as their actions can be expected to come under increased legal scrutiny. In such cases, the selection of an advisor should be based on an objective, fiduciary minded process that is UPIA compliant.

Along these lines, let's review four strategic tips that professional fiduciaries should use to ensure a prudent investment process is followed and executed effectively.

Tip #1: Develop an Investment Policy Statement

An IPS can be considered as a crucial document for fiduciaries. It outlines the investment objectives, risk tolerances and strategies for a specific portfolio. In short, a well-crafted IPS allows fiduciaries to demonstrate compliance with the UPIA — as well as providing a basis for evaluating the performance of their investment advisors.

Fee-only fiduciary investment advisors should be versed in creating defensible IPSs that align with the UPIA's guidelines. At Index Fund Advisors, for example, a risk assessment tool using questionnaires is employed to objectively assess a beneficiary's liquidity needs, time horizons and risk tolerance levels. Academic research and MPT are then utilized to design an optimal asset allocation that is documented in the IPS.

Tip #2: Assess Portfolio Diversification and Risk Management

The UPIA emphasizes that performance and risk should be evaluated under a fiduciary standard of care. It further stipulates that diversification is a core component of prudent investing. By delegating the implementation of an appropriate investment process and asset allocation strategy to a fiduciary advisor, trustees can reduce or potentially eliminate liability associated with investing results.

A prudent investment process, as utilized by IFA, involves applying MPT, Nobel Prize-winning research and past performance data spanning a minimum of 50 years to provide valuable insights for the creation of an investment policy statement and corresponding portfolio implementation.

Once an IPS is established, a globally diversified investment portfolio can be implemented to maintain the desired risk level. Quarterly reviews should be conducted to ensure oversight and governance. If any changes in circumstances arise, the fiduciary should consult with the advisor to determine if a new risk tolerance level and updated portfolio implementation are warranted. Any such alterations would be documented in the IPS.

Tip #3: Use Portfolio Diversification to Mitigate Risk

An essential aspect of risk mitigation is providing a broad range of portfolio implementations designed to maximize expected return for risk taken. This process involves two key steps: determining the beneficiary's risk tolerance level in the IPS and customizing asset allocations using global investment opportunities.

IFA accomplishes this by offering 100 globally diversified portfolios. This approach allows for the precise implementation of risk exposure to match risk capacity identified in the IPS.

Tip #4: Investment Related Transparency

A critical component of a fiduciary's decision to delegate investment responsibilities to an evidence-based fiduciary advisor is the ongoing oversight of that advisor. The following information should be reviewed by the fiduciary and advisor at least annually to ensure that the investments are meeting the goals outlined in the IPS.

A.) Portfolio Allocation and Underling Fund Managers: It is essential to confirm that the portfolio allocation continues to be appropriate given any changes in the beneficiary's circumstances that may have occurred in the prior 12-month period. IFA's Risk Capacity Survey provides a straightforward and effective method to assess an appropriate risk exposure to meet the goals of the beneficiary as outlined in the IPS. This survey should be taken no less than annually. In addition, it is prudent to review each underlying fund manager in the portfolio implementation to ensure they are continuing to adhere to their stated investment principles. IFA's quarterly Performance Monitoring Report (PMR) provides ongoing review of all passive fund managers used in portfolio implementations.

B.) Benchmark Construction and Comparison: Appropriate benchmarks should be constructed that reflect the underlying asset allocations and factor exposures of the portfolio. Comparing the performance of a passively managed portfolio to a benchmark that does not reflect the investment objectives of the actual portfolio is meaningless.

C. Fee Comparisons: Fee benchmarking is a good fiduciary practice to ensure that the fees being paid for fiduciary investment advice are not excessive.

Taking an Objective, Fact-Based Approach

In the highly competitive asset management industry, fiduciaries must prioritize the protection of their clients through objective, defensible processes in selecting, reviewing and evaluating investment advisors. By adhering to an objective decision-making framework, fiduciaries can effectively navigate the investment delegation process.

With close to 25 years of experience and over $5 billion in assets under management as of December 31, 2023, IFA is well-positioned to provide valuable guidance for fiduciaries. Utilizing an evidence-based academic approach to investing, IFA takes pride in replacing investment speculation with an education to investors nationally.

Fiduciaries interested in a no obligation, complimentary review of your current investments can email Kerrie Lloyd at [email protected].

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Kerrie Lloyd is a vice president and institutional consultant at Index Fund Advisors Inc. (IFA). With more than 30 years of experience in financial services, she is the author of "Planning the Future for A Special Needs Child" and the founder of Integrative Solution Services LLC, where she provides consulting and collaboration tools to the special needs community. Lloyd has earned the Chartered Special Needs Consultant (ChSNC^®) designation and is also a Doctor of Natural Health (NhD) from Clayton College of Natural Health. In addition, she has earned her certification in Pivotal Response Therapy for Autism through the Koegel Autism Center at UC Santa Barbara (now at Stanford University).

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This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.