An Evaluative Framework for Strategic Donors

Letters

BY GABRIEL HAMENT SRQ DAILY SATURDAY PERSPECTIVES EDITION SATURDAY JAN 14, 2017

“To give away money is an easy matter and in any man's power. But to decide to whom to give it and how large and when, and for what purpose and how, is neither in every man's power nor an easy matter.” – Aristotle, 4th century BC

The contribution of a large financial gift to a nonprofit organization or community foundation represents a significant milestone in a donor’s life. This transfer of wealth, from the donor to the balance sheet of a recipient institution, is often made possible by a lifetime of cumulative personal financial decisions on the part of the donor. For many, this means 30-40 years of diligent saving and prudent investing.

If a donor chooses to contribute a gift without imposing restrictions, the assets may be deposited into an unrestricted endowment fund. The endowment fund may have been established with the objective of supplying the organization with a perpetual stream of funds to support ongoing operations or special projects, deemed appropriate by board members and the executive team. Typically, this fund is governed by an investment policy statement that codifies how the endowment assets may be managed, how performance is tracked and benchmarked, the process by which investment managers are selected and monitored, and other procedures associated with the management of donor capital. Oftentimes, nonprofit endowments are operated efficiently and conservatively, so that over an entire market cycle and net of fees, the endowment generates returns that match or exceed the relevant benchmarks. This would be an ideal scenario and attractive to current and prospective donors.

In an effort to encourage philanthropists to apply the same level of scrutiny to their philanthropic “investments” as they do to their personal investments, I compiled a set of criteria prospective donors can reference when allocating charitable dollars.

Investment Management and Custody

  • How will donor assets be invested to satisfy the perpetual mandate enumerated in the gift agreement?
  • Does the organization maintain a separation between the investment management function and the custodial function?
  • Does the endowment contain illiquid investments, funds-of-funds with multi-layered fee structures, securities denominated in foreign currencies, private equity, venture capital or hedge funds?

Fee Structure

  • How much is the organization paying in fees associated with the management, administration and custody of the assets?
  • How does this fee structure compare to organizations with similarly sized endowments?
  • Is each fee separately determined and paired with a service so that each service provided may be evaluated independently?

Performance Monitoring

  • What process is in place to monitor the performance of the organization’s endowment?
  • Are donors kept apprised of the performance of the endowment pool on a monthly or quarterly basis?
  • If the performance of the investment pool routinely fails to meet prescribed benchmarks, what action is taken? For how many quarters may performance of the investment pool fail to meet or exceed the benchmark until action is taken?
  • Is the performance of illiquid investments (Level III assets) reported separately from the performance of marketable assets (Level I assets and Level II assets)?
  • Are donors offered the option of “opting out” of a pool that contains Level III assets?

Due Diligence

  • How does the organization select investment managers?
  • Are all qualified firms invited to participate in the selection process?
  • What is the process for drafting requests for proposals for investment management and administrative services?
  • When the organization issues an RFP for investment management and administrative services, are commercial banking services bundled with investment management and administrative services? Additionally, in the RFP, if banking services are bundled with investment management and administrative services, are firms that specialize in investment management disqualified from consideration by the investment committee or board of directors?
  • Are background checks undertaken on the individuals and firm principals managing the organization’s assets?
  • Has/have the firm(s) and/or the individual registered representatives managing the assets of the organization been the recipient of customer complaint(s) that resulted in fines or citations levied/issued by a regulatory agency?

Governance

  • Is an Investment Policy Statement on file, to which donors, board members, and executive team members can refer?
  • Is the title of the organization’s endowment funds held by a local community foundation? Does the organization’s board of directors retain full control over how these funds are invested and distributed? Is the distribution of funds to the organization from the endowment held at the community foundation dependent upon approval from the executives and/or board of the community foundation?
  • If a board member, a board member’s family member, or family member of an executive employed by the organization provides financial services to the organization, is a “recusal rule” or a “no conflict of interest rule” upheld by the executive team, board of directors and associated committees.

Gabriel Hament is an investment advisor representative with Cumberland Advisors in Sarasota.

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