The Case for Holistic Endowment Management

Summary
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.

Mission
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 But with the help of unpublished material I found and augmented with research over several years, I created what became Endowment 101.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
901.494.4444
wccowanjr@gmail.com

What’s in a Name? Maybe a lot if it’s the word “Perpetual”

Healthy endowments aim to grow through new gifts. One of the challenges of attracting those gifts is that your prospective donors, like many people, may not think of endowments as truly perpetual things but more like reserve funds that could be tapped in an emergency. The thought that one’s life savings could be frittered away plugging budget shortfalls isn’t very appealing. Donors prefer to make a lasting difference.

One of the easiest ways to inspire donor confidence is by including the word perpetual in your fund’s name. “Perpetual Endowment Fund,” on a handout for example, makes the right first impression and answers an important question before it’s even asked. It will also help those in governance roles remember to be good stewards. It’s just harder to spend down a fund carrying the label perpetual. So make sure it’s always used, even when the fund is only referenced as a single line item on a report.  And don’t let your Treasurer shorten it.

Even if a fund carries a donor-imposed restriction for use as endowment, perpetual is still useful as a constant reminder of the legal and fiduciary obligations to preserve its spending power. Those obligations are spelled out by UPMIFA, the Uniform Prudent Management of Institutional Funds Act(s) which have been adopted in 49 US states (see upmifa.org for details). If there are any perceived ambiguities about the intent of a donor, the inclusion of perpetual in the gift instrument could eliminate them. Now some may see this as a disadvantage because it could restrict the organization’s flexibility in using the funds. But if that’s a concern, you may be better off calling your fund a reserve fund or, better, splitting off enough into a reserve fund that the remaining endowment fund can be embraced and promoted as a perpetual affair, honestly and with no hesitation. Healthy endowments need to be affirmed by all stakeholders without reservation.

Conflicts of Interest: A Pervasive Threat to Healthy Endowments

Among the barriers to endowment health, the most pervasive at organizations without professional development staff is the use of an insider as an investment adviser.  These arrangements usually arise as a reasonable response to the perception that either the group lacks the skills to comfortably hire and supervise an outside advisor or the amount to be invested isn’t enough to support a more professional arrangement. Down the road, the organization can find itself stuck in an awkward position because nobody wants to risk offending the advisor by asking tough questions, much less by replacing him or her.

The best way to avoid getting stuck like this is to never get into such an arrangement to begin with.  Instead, the insider should be asked to be on the endowment committee where, unencumbered by the conflict of self-dealing, he will be able to provide unbiased advice. No professional advisor should be surprised to be asked to avoid a conflict as he already has to comply with similar professional standards on a daily basis just to maintain his licenses.  What is professionally awkward, however, is serving on an endowment committee where an insider is the advisor or worse, sits alongside you on the committee!

No surprise, conflicts of interest are also generally viewed as imprudent and violative of the fiduciary standards to which non-profit decision makers are held. That means conflicts could be illegal under UPMIFA, the Uniform Prudent Management of Institutional Funds Act(s) which have been adopted in 49 US states (see upmifa.org for details). It states that in selecting and working with an investment advisor, an institution shall act “with the care that an ordinarily prudent person in like position would exercise under similar circumstances.”  Some states, such as New York, go further and specifically require institutions to consider an agent’s “independence including any conflicts of interest.”  So check the provisions in your own state.  Of course, if you have to check which state you live in to see if you’re breaking the law, isn’t that itself a sign that you’re falling short of the fiduciary standard of ordinary prudence?

An even better reason to avoid such arrangements is that endowments managed by insiders typically don’t grow.  Endowments need to engender ownership by all stakeholders in order to attract buy-in and grow.  Nothing undermines ownership more than having an endowment associated with a single insider who is being paid.  If your endowment is known as “the thing that Joe runs,” you’ve lost the battle. Resolve now to eliminate conflicts of interest.  No large, professionally managed university or foundation would settle for less so why should you?

NOTICE:  The preceding is not legal advice but rather food for thought.  As suggested, you should seek professional legal advice if you have any questions about conflicts of interest.

The 90 Second Endowment Committee Report

Annual meetings offer an easy opportunity to promote your endowment fund to members. Why just give a bare bones report when you could use your timeslot to increase visibility and ownership while planting seeds that could grow into gifts?

Here’s an example for a church endowment:

“The Christ Church Perpetual Endowment Fund, which has a current value of $647,000, was established by the Board with money that Mrs. Porter left us in her will. Now I never met Mrs. Porter but I’m told she always sat right over there so she could hear the choir. And she wanted to make a lasting difference by leaving money she’d accumulated over her lifetime to the church to create an endowment to help pay for our music program year after year after year. Forever.

“And to make sure that happens, we only spend a small portion each year so that it will be around forever. And we manage it very conservatively in accordance with state law and following policies adopted by the board. Which are all in this book I’m holding up, which is available for viewing by any member in the church office at any time. You shouldn’t even have to ask for it – it’s supposed to stay in the bookshelf right there when you come in the door. And you should find a recent statement in the back too.

“Friends, this is your endowment fund just like this building is yours. They were both provided for us by those who came before us but it’s up to us to nurture and grow them to provide for future ministries.

“That’s what Mrs. Porter did. She’s not with us but she’s still helping pay for the music we get to hear. This year, the earnings on her gift provided a little over $25,000 for our music program. Isn’t that a great thing to be remembered for? That’s her legacy. If you would like to create your own legacy, please consider the Christ Church Perpetual Endowment fund and see me or the Planned Giving Chair.

This pitch makes appeals based on legacy, ownership, duty, and then legacy again.  I’m looking for suggestions for improvements so feel free to comment below (In particular, I’d like someone with more planned giving marketing expertise to look it over).