Four Questions to Ask if Your Nonprofit is Considering an External Endowment Manager

Dan Rubin, Managing Director, First Republic Bank, and Rebecca DeCesaro, Wealth Manager, First Republic Investment Management
September 8, 2017

Hard-fought donor dollars are precious assets, which makes your endowment one of the most important areas you can focus on to ensure long-term sustainability. What’s more, endowment management is becoming increasingly complex and labor intensive. A strict regulatory environment, fiduciary responsibility requirements and unique organizational investment needs all add up to a wide range of complexities that can leave board members strapped for time, without the consistent bandwidth necessary to focus on actively managing these assets. As an organization grows, many nonprofit leaders start to look for areas where an outside partner can be brought in, so their focus can be placed in the areas that matter most. Is an external endowment manager the right fit for your organization? The following four questions can help you decide.

How familiar are you and your board with current investment policy statement trends?
Even the most well-informed board of directors isn’t always finely attuned to the endowment trends within an industry or sector. That’s where an outside expert can help. The right external endowment consultant will be aware of the strategies being effectively applied by other nonprofits. They can review the investment options available in the market and advise what is appropriate for specific endowments. Endowments come in all sizes and the options should be tailored the endowment size and cash flow needs. That specialized knowledge can be leveraged to solve the unique investment challenges faced by your organization. An effective external endowment manager or consultant can:

  • Ensure your allocation is appropriate for your investment goals
  • Ensure that the funds or managers selected to build the portfolio have reasonable fees as well as performance history
  • Closely inspect your overall investment options, combing through for unnecessary redundancies that can sometimes hamper return and often crimp risk mitigation strategies
  • Help avoid an unhealthy reliance on proprietary investment options
  • Make tactical adjustments as external events shift and internal motives transform
  • Keep you up-to-date with accounting changes and evolving investment policy issues
  • Compare your endowment coverage ratio with your peer group
How involved is your investment committee, finance committee or board of directors?

An external partner can mitigate the risk of any internal conflicts of interest or turnover, as well as help ensure overall good governance as it relates to the management of your endowment. They also provide a consistent source of vetted, expert advice with dedicated capacity to serve your organization as your board and mission expand.

Of course, board committees play an integral role regarding all large-scale organizational objectives. An external expert acts as an extension of your board, a strategy that strengthens their ability to remain well-informed, while also freeing precious hours that can be used to further the mission of your organization.

How is your endowment performing relative to its peers?
The measure of effective investment performance is more than just the reported absolute number. In-depth, individualized performance reporting can help a nonprofit gauge how well (or poorly) its investment vehicles are performing relative to similar funds and sector benchmarks.

An external manager will keep the board informed, providing insights into why particular industries may be increasing or decreasing in value, based on overall market and economic conditions.

If it becomes clear that a particular investment is under-performing, an external manager can analyze why, decide when it’s time to make a switch, and help find and facilitate the move to an alternate investment option.

Is your nonprofit poised for growth?
An organization’s needs can change drastically — and quickly — particularly just prior to and during expansion. A nonprofit accustomed to an annual four or five percent spending policy, for example, could find it requires additional funds to meet its growth or cash flow objectives during specific periods. An effective policy statement will include the flexibility to increase the draw, if needed.

An external partner can help a nonprofit not only build a responsive spending policy, but also identify ways to meet individual investment goals in a way that aligns with the organization’s overarching mission. Is stability the goal? Growth of capital? Growth through an endowment campaign? A partner can help identify opportunities to meet these financial goals and work alongside you to bring them to fruition, all while remaining true to the organization’s risk tolerance and remaining cognizant of current liquidity needs. 

In short, an external endowment manager or consultant acts as an organization’s external Chief Investment Officer… plus a little more. It’s a partnership that keeps board members well-informed, while also allowing them the freedom needed to further the organization’s mission

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.”

©2017 First Republic Investment Management