The following question was sent to us from an investment committee member for a local medical research institute:
Q: We as a committee have done most if not all of the things suggested in your Prudent Practices handbooks. We have a situation where one of the senior members of the board has recommended an investment that lands outside our current investment policy statement (IPS).
It is a synthetic insurance product. We have current benefactor who is 82 years old, in good health and has excess insurance capacity. His insurance agent has proposed we take $1MM from our endowment and buy a $1,060,000 insurance policy and a single premium annuity. The income for the annuity will not only cover the insurance premiums but will allow for a current cash flow on the investment. When the client dies, the annuity will disappear but will be replaced by the insurance policy. (Almost like a synthetic bond with a yield to maturity of 8.0%. But the maturity of the investment depends on the date of death of the participant)
I’m not terribly comfortable with this. I was wondering if fi360 has any opinion on this vehicle when it comes to Endowments. Thank you for your help in advance.
A: We always say that no investment is imprudent on its face and that certainly applies in this example. Having said that, however, the concerns you have are legitimate and need to be addressed. If the IPS does not address the investment in question, then the IPS should be changed to allow for it before making a decision to invest. This necessarily will lead to a thorough discussion about this investment’s pros and cons, which is exactly what should happen. It forces a discipline that helps to keep ad hoc investment decisions, that may not be prudent, at a minimum. Think of this investment in terms of the other six Fiduciary Precepts as well. For example:
- What standard or law governs this investment vehicle?
- Does it fit in with the overall asset allocation?
- Who is your prudent expert for this insurance vehicle? How were they selected? Was it an objective process?
- Have you considered fees and expenses? Are they fair and reasonable?
- Who has the expertise to monitor the prudent expert?
- Are there any conflicts of interest that will result from making this investment?
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