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Investing for a non-profit
Posted: Fri Feb 18, 2011 7:22 pm
This is a question that does not seem to come up very often on this forum so I thought I'd start a new thread...
I am a member of a non-profit cultural organization. I don't have many details to their financial situation (yet), but I've volunteered to help lead their financial efforts.
I know that years ago, a benefactor left much of his estate (likely measured in the hundreds of thousands) to the foundation. Since then, it has been under management at Edward Jones. As soon as I found out about this, I volunteered to join the financial committee to help get the foundation away from evil financial advisors for free. Good karma never hurts!
I have several questions:
1. What sort of asset allocation (domestic/international/bonds) should an organization be looking at? I'm assuming something akin to an allocation for someone already in retirement will be ideal.
2. Are there any ways for an organization to invest tax-sheltered accounts? For example, if they wanted to set aside money for scholarships for members' children, would they be eligible for a 529?
3. Obviously, I am looking at Vanguard solutions with low expense ratios here. It looks like if they can't get tax-sheltered investment areas, the below are their best bets (all of these are tax-advantaged as far I can tell):
VTMFX (0.15%) for domestic stock
VTMGX (0.20%) for international stock
VWALX (0.12%) for bonds
Any better recommendations?
4. Some of the money will have to be liquid. Is a high-yield savings account with American Express the best that I can do here at 1.3%? I can't find any better rates for liquid accounts that don't involve jumping through direct deposit/ATM card transactions.
Thanks in advance for the advice!
Posted: Fri Feb 18, 2011 11:04 pm
I'd suggest getting professional advice, especially around taxes etc.
Non-profits are not taxed in the same way corporations or people are, so the tax issues are totally different. In many cases, the gains are not taxed (or minimally taxed), so tax shelters for individuals do not apply.
Don't be so quick to dismiss an adviser. It may be the right thing for this organization, and be well worth it, to have a professional manage the portfolio (even if the portfolio is made of up index funds). The needs of the portfolio are likely different than those of a retired person, b/c future liabilities, tax issues, required distributions, etc are all very different. I don't know if Edward Jones is good or not, or what they charge.
The asset allocation you decide on needs to be based on how the organization plans to use the money. For example, private foundations must pay out 5% every year, so they often will have an asset allocation targeted at producing 5% real yield every year, so they can maintain the corpus. Do you plan to spend the money, grow it slowly, maintain it and spend the yield, etc. This is where a professional might be able to advise you well on an asset allocation for this specific situation, and help with tax implications and regulatory issues.
Posted: Fri Feb 18, 2011 11:26 pm
I'd ask the EJ guy to make his case for what he's done for you and then call up Vanguard or TIAA-CREF. Asset allocation should be simple enough -- e.g, if you want to withdraw substantially more or less than 4% of endowment per year adjust the recs for individuals accordingly, if you really want to ape an endowment pro ape Swenson, etc. On the tax issues it can't hurt to ask whoever prepares the org's taxes, but basically there should be some subset of investment income and cap gains that's taxable for 501c3's and some subset that isn't, and upon figuring that out that too can be something to consider in your plans . . . if the EJ guy goes into stunningly more impressive and genuinely compelling detail about what he's doing for the org than this, more power to him, but I'll be surprised if he's able to do that.
Posted: Thu Mar 03, 2011 12:00 pm
I will be meeting with the EJ advisor within a week or two.
Before I go, I thought I'd ask for a more advice about what to discuss besides fee structure, asset allocation, and tax issues.
I understand that an advisor may be the way to go for the organization's peace of mind (blegh), but if that is the case, I will want to thoroughly examine any advisor and be prepared.
Posted: Thu Mar 03, 2011 3:42 pm
Before the meeting, take time to read and understand the organization's financial statements. Hopefully they have been prepared in accordance with GAAP, especially FAS 117. That will help you know what the investments are and what different pools there may be.
For an example, if part of the investments are meant to be an income producing endowment that is permanantly restricted, part are meant to hold a building fund to use up in the next few years, and part are meant to provide the organization's equivalent of an emergency fund, there should be three separate pools with three separate investment strategies. The advisor should have given different advice for each, and each should be following a different strategy.
You and other current decision makers may have different priorities than past decision makers. Thus area to probe is whether his past decisions were decent ones for past priorities. To do this:
1) Ask the advisor what the organization has told him in the past that guided his selection of investments. Purpose of investments, having separate pools, time frames, goals, etc...
2) Then ask the advisor what advice he gave for each pool. Discuss why that was his advice. If the current investments don't match the advice then also ask who and when were decisions made to do something differently.
Of course, you can doublecheck the communications from the organization's internal records. The organization should have an investment policy statement, it should have records of what restriction(s) are associated with the major donor gift(s). Some of this should be made clear by good financial statements, some may require digging in past minutes.
Posted: Thu Mar 03, 2011 4:01 pm
Your corporate by-laws might be a guide. The non-profit I took care of for a few years was not allowed to invest in risky assets like stocks, or even bonds at all. CDs and MMs were the norm. Treasuries may have been OK, but just convincing the board to avoid excess fees was as far as I ever got accounts-wise. If we had our assets at a place like Edward Jones, we would have been paying extra fees to watch our principal shrink, and that may be what your situation is now. -- Tet
Posted: Thu Mar 03, 2011 4:42 pm
I am the president of a small not-for-profit, and handle the investments. I've basically invested the same way someone in retirement would, with 60% stocks and 40% bonds, all in Vanguard. Since it's a not-for-profit, it's basically like a huge IRA, in that I can trade or rebalance all I want without tax consequences. I pay income tax/SS/MC on my salary that I'm paid by the company, but money within the company isn't taxed.