The Case for Holistic Endowment Management

There is a glaring need within the nonprofit community for endowment guidance – a need that could best be met by an investment manager with a holistic focus on endowments.

Endowments are underserved.  I learned this firsthand over a decade ago when I chaired a startup endowment here in Memphis and had trouble getting the help I needed.  As a result, we made a lot of (preventable) mistakes which ultimately led to the endowment being raided to fix a budget shortfall.  But I didn’t realize how common our experience was until the news came out that the Memphis Symphony had zeroed out its $6 million endowment.  Typically, the Symphony’s board members are among the savviest people in town.  So if it can happen there, it could happen anywhere.  As it turns out, endowment raiding is very common and it poisons donor confidence.

There are plenty of investment managers who can manage funds. There are plenty of fundraising consultants who can direct a campaign. But there is no readily available assistance for addressing common endowment concerns like structure, documentation, nurturing donor confidence and preventing raiding. After all, if an endowment is spent down, who cares that it was invested well? My mission is to build healthier, more stable nonprofit organizations by using digital technologies to bring comprehensive endowment training, guidance, and management to the market.

A new holistic approach
There really is no handbook or curriculum that squarely addresses the need. But with the help of unpublished material I found and augmented with research over several years, I created what became Endowment 101. It’s more than a mere checklist; it’s a comprehensive planning process that starts with a question that rarely gets asked: What does success for an endowment program look like? For most, this leads to recognizing growth through new gifts as a primary goal, which, in turn, requires pursuing the right policies and culture to nurture donor confidence (and make raiding unthinkable).

Testing the market
As a market test, I created a seminar series and experimented with various means of marketing it. Ultimately, the registration responses were strong enough that I could narrow my focus to well-known organizations only and quit marketing ahead of schedule to avoid running out of space. The experience validated market interest and yielded a wealth of insight into nonprofits’ needs and appetite for our methodologies through written evaluations and onsite follow up visits. Organizations with one or more participants included:

Church Health Center                             Memphis Library Foundation
Cotton Museum                                         Memphis Opportunity Scholarship Trust
Dixon Gallery and Gardens                    Opera Memphis
Kirby Pines Foundation                           Pink Palace Museum
Memphis Area Assn. of Realtors          Playhouse on the Square
Memphis Heritage                                     Shelby County Books from Birth

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From vision to practice
Realistically, a one-shot class isn’t likely to have much of an impact on an organization. But a regularly scheduled orientation class for new endowment committee members could keep endowment stakeholders on the same page through the inevitable turnover and institutional memory losses that plague the nonprofit world.  Endowment 101 is designed to fill that need.

In essence, Endowment 101 is a call to action: If you’re going to do it, do it right. It’s a tall order and more than most committee members signed up for. But an endowment-focused partner could shoulder much of the burden, going beyond the training role to variously coach, hand-hold or coax nonprofits toward their endowment objectives. Some of the services needed, such as those pertaining to disbursals, sub-accounting, and UPMIFA standards, could be handled most efficiently by the investment manager. This makes the holistic endowment specialty a natural fit for bundling with investment management. Besides, with fees based on assets under management and deducted automatically, the money managers command the most practical revenue model for the services required.

The financial planning precedent
Bundling services like this is really nothing new. Many investment management firms have thoroughly integrated financial planning and implementation assistance into their practice and get paid through management fees alone. But there’s no equivalent model for endowments. Most come in the door in the form of an RFP that may have gone to ten firms so right off the bat, there’s an imputed one in ten chance of winning the business. By contrast, when an individual prospect goes through the entire financial planning process with an investment manager, the win rate for the assets is more like nine out of ten.  I believe the same model will work for endowments and with similar results. Sure, not all nonprofits will want our services just as not all individuals want a new financial plan. But leading with training attracts people who qualify themselves as good client prospects by their participation.

From time killer to category killer
Some advisors say endowments are a waste of time because they’re fickle and political. But fickleness is a standard consumer response to products that lack differentiation. Similarly, awarding business to trusted friends is a comfort-seeking behavior seen whenever products are opaque and undifferentiated. And from where the client sits, most investment management firms just aren’t as differentiated as they may think. They all address the same thing: investments. By my measure, that’s only the fourth largest concern that organizations have about their endowments. Nonprofits need an investment firm that can address all their concerns. Doing that will redefine the market so thoroughly that competitors will look like they’re not even in the same business. To press the advantage even further, adopting a business name that begins with “Endowment” and having only charitable assets under management (verifiable online) would confirm its position as the market’s category killer – a business that owns its space so thoroughly that other firms don’t even bother competing and may even refer clients to it.

Scaling Up                                                                                                                                                         

Perhaps the most exciting feature of this business model is that it offers scalability unheard of in the investment management industry.  There, the main constraint to growth is talent and the only way to grow quickly is by luring rainmakers away from other firms.  But the holistic endowment model holds the promise of replacing those constraints with a sales and service process that is largely digitizable.  For example, marketing and training seminars, once they are perfected via live iterations, could be offered more efficiently on a webinar platform.  The model is also well-suited for digital marketing strategies in ways that regular investment management businesses aren’t.  I believe this business could be grown rapidly into a sizeable national investment manager with very sticky assets that would command the highest multiples of earnings in valuation.

Curt Cowan