Non profits are increasingly turning to professional wealth managers

June 23, 2009 | Comments Off on Non profits are increasingly turning to professional wealth managers

Recently I read an article on Wall Street Journal about the trend of NGOs turning to professional wealth managers for financial help. The article cited that the total foundation assets in the US dropped about 22%, or almost $150 billion, in 2008.  There are many benefits for charity boards to use professional financial advisory services, they include due diligence, risk management and diversification.

Due Diligence
Most charity board members are themselves successful entrepreneurs, their time is scarce and they are too busy to perform the due diligence required for investment decisions. Many of the non-profit staff are qualified in many areas but are not finance experts. The responsibility of asset allocation often falls on several over-committed board members and a CFO who doesn’t know much about portfolio management. Besides the time factor, most non-profit CFOs have not been educated properly on how to carry out due diligence when it comes to choosing investment vehicles. The lack of expertise in finance is one reason why over 140 foundations lost money in the Madoff scandal.

Risk Management
One reason why many charitable organizations choose to manage the money themselves and rely on in-house resources is cost. They believe that the asset management fees charged by wealth advisors are not justified. Many overlook an important issue here: the opportunity cost of NOT having a professional advisor is very high. Without proper knowledge of the equity and fixed income markets, non-profit CFOs often have difficulty quantifying the risk they are taking, and the expected return, let alone time valued of money and other more advanced concepts. The best they can get without a qualified advisor is a ballpark figure. Only with proper mathematical models and solid knowledge of the market one can understand clearly where the organization is standing financially.

Asset Allocation & Diversification

Currently many charities are still using the same investment vehicles they have been using for the past 30 years: Bonds and equities. Over the past 30 years many new investment options become available, if used properly, swaps, options, futures and alternative investments can help an organization to hedge market risks. A good wealth advisor can introduce you to a wide array of investment products that suit your organization’s investment philosophy, while limiting your risk exposure.


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