Conformity with fiduciary best practices allows a community foundation to maximize investment performance and its support of local institutions. Donors, their advisors and community foundations must resist the temptation to burden the investment process with arrangements that may impair such conformity, diminish investment performance and reduce charitable distributions.
There are some 75,000 grantmaking foundations in the U.S., which control $600 billion in assets and award $50 billion in grants a year. Though community foundations represent less than 1% of grantmaking foundations, they make nearly 10% of the grants. Numbering around 700, they have assets of $50 billion and award annual grants of $4 billion.
Community foundations play a key role in the philanthropy of the nation and of the region in which they operate. However, in common with other philanthropies, they compete for financial contributions, particularly among individuals with significant wealth for whom several philanthropic distribution channels exist.
One way for community foundations to attract donors is to cultivate relationships with wealth managers. By providing wealth managers with education and other services, they assist wealth managers in guiding their clients' philanthropy. For their part, wealth managers recognize the need to assist wealthy clients with their charitable endeavors but they may well be reluctant to see assets under their management diminish by way of a transfer of wealth to a community foundation, where asset management is entrusted elsewhere. To overcome this impediment, some community foundations will agree to establish special funds in which the donor's assets can be managed by the donor's wealth manager.
It is in the establishment of these arrangements that donors, their advisors and community foundations need to be mindful of their respective fiduciary obligations.
Typically, contributions to community foundations are pooled and form a permanent endowment, the management of which will be entrusted to professional asset managers under the direction of the community foundation's investment committee, and according to an investment policy established by the foundation. Under similar direction, a community foundation may also offer donors additional pooled funds to which their assets may be transferred and from which more liberal distributions of principal as well as income are permitted.
Of the 700 community foundations in the U.S., 570 are members of the Council on Foundations. More than 425 of these have earned the National Standards Seal attesting to their conformity with the highest standards in grantmaking integrity and accountability. Among the National Standards to which community foundations must conform in order to earn the National Standards Seal is one requiring sound oversight and transparency of investment and spending policies. Oversight in the form of due diligence in the selection of asset managers and in monitoring their investment performance on an ongoing basis are important fiduciary functions that any prudent foundation will follow. For most community foundations with some four to six endowed and non-endowed funds to oversee, this will involve perhaps as many as 20 to 30 managers. So, donors and their advisors should be aware that the addition of one or more special funds, the assets of which are managed on behalf of the foundation by a donor's family wealth manager, significantly increases the fiduciary burden.
First, the community foundation is faced with increased due diligence to ensure that the selection of a family wealth manager is prudent and accords with the foundation's established manager selection criteria. Second, there must be an examination of any conflicts of interest the wealth manager may be subject to, taking into account in particular the wealth manager's continuing relationship with the sponsoring donor. Then, assuming that a wealth manager is considered satisfactory, the community foundation must ensure that the advisor's compensation is reasonable, recognizing that, were the donor's assets to be pooled with existing funds, the management fee would reflect the economies associated with managing a large pool of assets. Finally, the foundation must monitor and evaluate the wealth manager's investment performance on a regular basis. Repeating this process for multiple gifts generates a fiduciary burden of some magnitude!
To mitigate fiduciary exposure, community foundations should ensure that they have policies and resources adequate to meet the challenge, but they may also require a donor's wealth manager to submit to independent verification that it conforms to prudent practices. An advisor might consider seeking such verification of its own volition--in light of its own fiduciary obligations that arise in favor of a foundation--once a donor's assets are transferred to the foundation. These include putting the interests of the foundation ahead of those of the advisor and ensuring that investment management fees and expenses are reasonable from the foundation's perspective; perhaps justifying a reduction compared to the fees charged to the donor.
Fiduciary Responsibility for the Donor
Donors who sponsor their wealth manager to manage investments on behalf of the community foundation also assume fiduciary responsibility. While gifts are sometimes made with strings attached, such as naming rights or restrictions on causes to be supported, it is another thing entirely to burden a foundation with investment arrangements that expose the foundation to increased fiduciary risk. Therefore, donors also have an interest in verifying their advisor's conformity with best practices
In summary, donors and their advisors should be mindful of the fiduciary burden that they impose on a community foundation when they advocate for the advisor to be engaged to manage assets donors transfer to the foundation. Donors who desire to see investment of their charitable assets remain with a particular advisor should consider establishing their own family foundation as an alternative.
Roger Levy, LLM, AIFA, is CEO of Cambridge Fiduciary Services, LLC, a fiduciary advisor and audit firm with offices in Greenwich, Connecticut and Scottsdale, Arizona.