Non-profit investment succession planning

Succession planning is a critical part of management at all well-run organizations. Non-profits are created for purpose, working to the mission of the organization. While the investments are not core to the mission, they are core to achieving the mission. The specialized investment knowledge required is frequently far from the organization’s core mission and creating an ongoing staffing plan can be a challenge. With all that in mind, how do you manage investment-succession planning for a non-profit?

First, as part of regular governance, the fiduciary should be asking, “Who’s going to manage this thing if you get hit by the beer truck?” In all seriousness, the current governance structure should not rely on one person; that is also just good risk management.

Second, the fiduciary needs to review all levels of the organization: staff, committee, and external. Does the investment committee have upcoming retirements? Is there a chief investment officer and a handful of staff? Does the head of finance work with a consultant? How soon could new operations be put into place?

The difficult problem of non-profit investment succession planning

Making contingency plans to replace governance takes thought and effort, but for most non-profits, it is especially challenging. Here’s why:

  • Non-profit staffs are small. If you have a staff of only five people, the chances that the second-in-command is ready to take over running the investment function are logically slim. Building out a meaningful career ladder on a small team working in a non-core function is tough.
  • Committees turn over too. Some committees pick managers, some approve cash flows, some only approve an IPS and review staff-delegated items. In all of these cases, the committee members need to have succession planning for themselves. The fiduciary must determine their own success plan and the plan for each operational node that has delegated responsibility.
  • There’s a big learning curve. Investing is complicated. The organization needs to work with external managers, auditors, consultants and custodians. The largest undertakings happen but once a year, thus taking years to build the institutional knowledge of staff, committees and external service providers.

When is OCIO logical?

OCIO is not logical for every organization. But given that an OCIO can tailor your services, it’s probably more logical than at first blush.

If you’re thinking about your organization’s succession plan— aka, the beer truck—then you should think about some level of outsourcing and contingency risk planning.

Firms with robust capabilities have intentional redundancy in the system, across management, teams, and systems. They manage other related continuity risks as well—such as cybersecurity—with robust, vigilant purpose-built efforts. The investment succession planning should be approached similarly.

Other considerations to include as part of succession planning:

  1. Consider your strategic advantages. Understand the spectrum between insourcing and outsourcing—it’s not an all or nothing thing. (The best OCIO providers will meet clients where they are.) Some clients don’t have a great legal department and thus manager contracting is not a strategic advantage, so they outsource it, but decide to keep actual manager selection decisions in-house. One way to approach succession planning is to look at your greatest, lay-awake-at-night risks and just outsource those.

    Regarding succession specifically, one CIO we work with who is near the end of their career has begun to prepare the firm for their departure by just outsourcing risk management. This way, the firm can test the OCIO waters with this one assignment, and then potentially move further along the outsourcing spectrum while having an unbiased third-party provide targeted management and advice.

  2. Create optionality within the firm, investments, and operations. There is value is optionality. Hiring a team, via OCIO, rather than hiring an individual, reduces risks of institutional knowledge loss. It manages the risk of all that knowledge disappearing when the elevator door closes each day. This is not a sales pitch. It’s just a fact. Part of your external team could include governance, risk management, and legal.

    Consider the following two succession scenarios. In option one, you implement changes to a new internal staff resource—either through an external recruiting and onboarding process or through promoting a junior member to the senior role. In option two, you outsource to an OCIO provider. Now let’s imagine, for whatever reason, you’re unhappy with the results. Is it easier to reverse with internal staff issues through firing and restructuring and re-recruiting and restaffing? Or is it easier to move to another OCIO provider?

The bottom line

What’s your non-profit’s investment succession plan? Senior leaders should seriously evaluate OCIO as part of a succession planning. But before you flip the switch, get educated on OCIO. An educated investor is the best kind.

Specialized expertise across all required investment categories. Small staffs, or a staff of one, cannot specialize across all functions (increase return, reduce risk, and manage costs). There are other subcategories that demand consideration as well: manager strategies, overlays, private markets, ESG and on and on.

Learn more about our customized OCIO solutions