Simplifying Advisor Selection Process for Your Endowment
When I first started doing nonprofit board work several years ago, I remember receiving advice along the lines of “Remember, your job as a Nonprofit Board Director is to advise. Knowing your boundaries is important for the success of the leadership team and the organization.” The challenge for many nonprofit board members, however, is knowing where those boundaries lie and when and how to get involved.
Oftentimes, the best support you can provide the Executive Director or CEO of a nonprofit organization is to ask thoughtful questions and provide your expertise in areas where she or he may not have experience. The key to building a strong and trusting relationship with the nonprofit organization’s leadership team is to be open about where you think the boundaries lie or to speak up when you can’t clearly identify the boundary.
One boundary that is clear for most board members is their review and approval of the annual budget, including the cash reserves and the longer-term investments — like the endowment or board designated fund. Most nonprofit boards delegate the financial and investment decisions to those on the board with career expertise such as the banker, auditor, CPA, financial advisor or insurance specialist. However, to practice good board governance, there should be a balance on the Finance and Investment Committee of other skill sets. Oftentimes, those without the deep expertise ask the important, clarifying questions.
Whether your nonprofit board has an existing relationship with a financial advisory firm or this is your first time engaging one, the following process will help simplify your approach and arrive at a decision-point for your board.
Step 1: Review and Discuss Your Endowment Investment Goals
We strongly recommend the Board give formal approval to the Finance or Investment Committee to source and review the advisory firm. Depending on your bylaws, your board may require final approval before an Investment Management or Consulting Agreement is signed with the advisor. If full board approval is required, then we recommend the Finance Committee present the finalist to the Board for review and approval. Involving the full board in deciding among the finalist is too time-consuming and not a productive use of the boards’ skill set.
After receiving formal approval to source the advisor, the Finance / Investment Committee should meet to discuss investment goals for the organization’s endowment or board fund before doing any formal outreach or requests for information. Having a clear understanding of these goals before you speak to an outside expert will save time and effort during your outreach. Documenting your goals, requirements and outcomes before seeking input is critical in keeping the process simple and straightforward.
The Finance / Investment Committee should discuss and document answers to the following:
- What is the goal for both the short-term and the long-term investments? What is the time horizon for each bucket of money? Are there shorter-term goals in the next 24-36 months such as a facilities’ repair or system upgrade?
- Will your organization require some planning analysis from the financial advisory firm in order to understand the budgetary needs between the shorter term and longer-term goals?
- Does your organization already have an endowment or board designated fund? If this is a new project, have you considered the benefits and drawbacks of either type? For more information on Endowment Investing, visit our video here.
“67% of a buyer’s time in purchasing a new service is spent on internal research and discussion.”
— Gartner Research, 2017
Step 2: Design Areas of Focus
Every nonprofit organization and board are unique. Designing areas of focus in your review and engagement of an advisor will help ensure you receive both the investment allocation that suits your organization but also the service model you deserve. According to a 2017 Gartner Survey, 67% of a buyer’s time in purchasing a new service is spent on internal research and discussion. Some areas to consider are as follows:
- Advisory Services: Do you need the investment advisor to draft and develop investment policy statements for your nonprofit endowment or board fund? Do you need financial projections and spend analysis? How involved will your committee be in the asset allocation and investment selection process?
- Board Education: Will your investment committee or board want or need an educational session? Does your Executive Director or Organization Leadership also value training and education?
- Fees: If you have an existing advisory firm, are you aware of the fees you’re paying? If this is your first advisory firm, have you done some analysis on the costs? Are you going to look at fee-only advisors?
- Investment Philosophy & Performance: Has your investment committee decided on an investment approach such as the use of low, cost passive strategies or actively management funds? Is your organization interested in social impact or mission-aligned investments? Does your committee have an annual target return in mind?
- Engagement/Service Model: How important is local relationship management? Does your committee want quarterly attendance at Finance Committee meetings?
- Partner or Vendor?: Is it important to your organization that the advisor have an expertise and/or passion in working with nonprofit organizations? Do they have other services or offerings which allow them to support your work? How important is it that the advisor be a fiduciary? Is it important to your organization that the advisory have a diversity pledge or commitment? Are women and minorities in senior management or primary client-facing roles?
Step 3: Develop a Timeline
The Finance Committee should develop a timeline to perform outreach, review proposals or summary-level information, engage in finalists’ presentations to the board, board approval and contracting and on-boarding with an advisor.
A Sample Timeline for Your Finance or Investment Committee
This may take from 3 months up to a year depending on how often the board meets, how decisions are made and the availability of board members to meet and review. One advisor colleague told me that his nonprofit client took 2 years before they made a final decision and another 6 months to onboard with the advisor.
A Sample Timeline for Your Finance or Investment Committee
Step 4: Deploy Your Request for Information
Some organizations choose to deploy their request for information by invitation only. Essentially, they are inviting a pool of advisors to submit information based on a list of criteria. The downside of this approach is that you may miss some emerging advisors that are minority-owned, highly specialized, niche in an area of social impact or women-owned businesses. If you are an organization that serves a minority group or needs a niche focus, you may be missing out on an advisor that is mission-aligned with our organization.
Still other organizations ask their board members for referrals on endowment management. This can be helpful in that it comes with a recommendation and someone who is familiar with the service offering and its quality. The downside is that it may cause conflicts especially if the board member or the board member’s family works at the firm. In addition, you may once again be missing out on diversity or a specialized provider if you continue to stay only within your network.
Instead, you may want to post on your website and invite firms to submit by a certain deadline. Then, you can notify your local CFA Institute society and Financial Planning Association Chapters of your request to get the word out. You can also approach your local Chamber of Commerce or, if available, nonprofit partners who address capacity building or work with a database of consultants (e.g., Center for Effective Philanthropy or Center for Excellence in Nonprofits).
We recommend 2-3 weeks at the most for advisory organizations to respond to your request for information or proposal. A longer time frame creates too much opportunity for board and/or committee members to lose momentum or get distracted by other priorities. A shorter time frame doesn’t allow for proper dissemination of the opportunity and for your organization to respond to questions.
“groupthink … a quick and easy way to refer to the mode of thinking that persons engage in when concurrence-seeking becomes so dominant in a cohesive ingroup that it tends to override realistic appraisal of alternative courses of action”
— Irving Janis, 1971, in Psychology Today
Step 5: Review
Each member of your committee should review the incoming proposals as each of you may have an area of expertise, when combined, can help ensure the right decision is made. You should appoint one committee member to develop a summary matrix of the most important points of comparison across the proposals. These priority areas may be listed in Step 2 above or your organization will add their own. For example, one client of ours wanted to know whether we worked with low-cost index funds. I sat on board where we were sourcing a new firm to partner with for financial and operational support. We valued expertise in dealing with our nonprofit niche in education due to the regulatory and compliance nature of our sector.
Depending on how many submissions you received, you should distill your choice down to 2-3 advisory firms who will perform a 15- to 20-minute finalist presentation to your Finance Committee. We recommend appointing a committee member as “host” who will introduce the advisory firm and facilitate questions among the rest of the committee. By appointing a host, you can also set clear boundaries with the presenting advisors and monitor time. Your committee is donating its time, talent and treasure to the organization so being respectful of everyone’s time in this process is key.
As someone who has worked in procurement and managed the process of vendor selection, I am aware of both the challenges and rewards to this process. Some common questions board members ask:
- Is it appropriate to reveal to the finalists their competition? If you are asked directly, it is perfectly acceptable to name the other finalists.
- Should you schedule the presentations back-to-back or on different days? This depends on the time and availability of your committee. It can be difficult to schedule members for regular meetings, so we recommend trying to arrange finalist presentations during regularly scheduled committee meetings. It is fine to have the presenters back-to-back.
- Should a committee member recuse himself or herself if they work for the organization presenting? Absolutely. Most bylaws have a “conflict of interest” policy and your board member should not be involved in any decision or vote concerning a company where they have a financial interest.
- What if our committee has questions that exceed the presentation time? Maintain your schedule in order to respect everyone’s time. The “host” described earlier, should document the questions and follow-up directly with the advisory firm via email for the answers.
Step 6: Decision Time!
After a 12- , 20- or even 52-week process, your committee may be exhausted and ready to arrive at a final decision. During this final decision-making process, it is important not to engage in groupthink. Irving Janis, in his book Victims of Groupthink, saw “groupthink …[as] a quick and easy way to refer to the mode of thinking that persons engage in when concurrence-seeking becomes so dominant in a cohesive ingroup that it tends to override realistic appraisal of alternative courses of action.”
It may be helpful to have each committee member rank the finalists independently first, and then share as a group, thus avoiding immediate consensus-building or decision-fatigue.
If your bylaws require board approval prior to hiring and signing the investment management agreement for your endowment, then you should inform the advisory firm they were selected as a finalist contingent upon board approval of the agreement.
Related Articles:
Won the Lottery? Don’t Do This. Managing Large Reserves.
Surprise! Why Nonprofit Investors Should Expect the Unexpected
Related Videos:
Overview of Reserves and Endowment Investing
Active vs. Passive Investment Management
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!
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