The Case for Holistic Endowment Management

There is a palpable 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.

Over a decade ago, I chaired a startup endowment in Memphis and had trouble getting the help that we needed. Subsequently, we made a lot of mistakes, all preventable, which ultimately led to the endowment being spent down to fix a budget shortfall. But I didn’t realize how common our experience was until I learned in 2014 that the Memphis Symphony, with some of the savviest people in town on its board, had spent through its $6 million endowment – a move that, given the unique characteristics of endowment donors, poisons the well for future endowment gifts. As it turns out, endowment program failures are very common and they constrict the ability of nonprofits to build permanent funding.

There are plenty of investment managers who can manage assets. There are plenty of fundraising consultants who can direct a campaign. But nobody properly addresses the whole endowment program, especially common concerns like structure, documentation, and nurturing donor confidence. 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 bringing comprehensive endowment training, guidance, and management to the market.

A new holistic approach
There really is no existing handbook or curriculum that squarely addresses the need. So after extensive research, I created what became Endowment 101. It’s a comprehensive primer and 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.

Testing the market
As a market test, I created my own seminar series and tried various means of marketing it. The resulting registration responses were so strong that I narrowed my focus to well-known organizations only and still had to cut off registrations early to meet space constraints. 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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The Endowment 101 seminar successes validated market interest and yielded a wealth of insights into nonprofits’ needs through written evaluations and onsite follow up visits. I have no doubt that making them available to nonprofits regularly would attract plenty of qualified prospects for endowment assistance. Those same sessions could also serve as an orientation for new board members that would keep them on the same page through the inevitable turnover and institutional memory losses that plague the nonprofit world.

In essence, Endowment 101 provides a call to action: If you’re going to do it, do it right. It’s a tall order and more than most board members signed up for. But an endowment-focused partner could go beyond the training role to shoulder much of the burden and coach nonprofits toward their endowment objectives. Many of the services needed, such as those pertaining to disbursals and UPMIFA standards, overlap with investment management functions. 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 effective revenue model around.

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 asset management fees alone. But there’s no equivalent model for endowments. Prospective endowment opportunities often go out to as many as 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 integrated 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. So I see a ready market appetite for an investment firm that can address all their concerns. Doing that would redefine the market so thoroughly that competitors wouldn’t even look like they’re in the same business. I believe that, with the right execution, this business could be a category killer – a business that owns its space so thoroughly that other firms don’t even bother competing (and may even refer clients).                                                                                          

The Opportunity
I am looking for an experienced partner who can manage assets and support the proposing and closing of new business. Preferably, it would be someone who is already tooled up with a solid platform and committed to fiduciary leadership. The ideal partner would also be capable of seeing and seizing an opportunity with national potential. The business could be incubated locally at a low cost to prove out and refine the business model before scaling up. This model holds the promise of replacing the usual constraints to asset growth with a process that could be scaled at costs that diminish with firm growth. I believe it could be grown into a sizeable national asset manager with very sticky assets that would command the highest multiples in valuation.

Curt Cowan
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