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.
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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.