The saying “go big or go home” can certainly apply to the selection of a Halloween pumpkin or a Christmas tree. But when it comes to client assets, size isn’t the all-important factor, especially for independent financial advisors, who are often small-business owners. Every client relationship offers an opportunity for advisors to build their practices, as well as strengthen financial wellness for clients and their heirs.
This includes endowments and foundations, which allow nonprofit organizations and institutions to survive, and make a positive difference, in communities across the country. Many of these entities consist of anywhere from $3 million to $5 million, or $25 million to $50 million, or less, under management. While these might not be considered large accounts for endowment/foundation consultants, they can often be sizable for independent advisors.
Although a small endowment, such as a $3 million endowment for a local church, will probably have an overseer, sometimes a board member or officer of the organization it supports, it also will tend to fall under the radar of a financial advisor or an institutional private wealth consultant to endowments.
The endowments and foundations marketplace is a big one for advisors, and there are plenty of them that would benefit from working with an engaged, holistically focused advisor. There are approximately 200 universities that have assets of less than $50 million each (cumulatively totaling more than $5.6 billion in assets), according to a National Association of College and University Business Officers study. Also, Foundation Center statistics data reveals there are at least 86,700 non-university foundations aiding a wide variety of missions, and they have more than $860 billion in total assets.
For advisors, one of the key selling points for an endowment or foundation in today’s marketplace is the capability to create a customized portfolio with environmental, social and governance (ESG) preferences. Larger endowments and foundations can go directly to different asset managers, or invest in performance aggregation software—and so can the larger advisors that they can afford to retain. Smaller endowments and foundations, on the other hand, likely don’t have the capability to access multiple investment managers or put together an ESG-tilted portfolio that takes into account their specific goals, outlook, risk tolerance, potential liabilities, etc.
Advisors with investment management expertise can work with an endowment or foundation to build out an investment policy statement, incorporate direct indexing, and provide ongoing support for monitoring and performance reporting. Using the investment policy statement, along with research and analytics, the advisor can create an ESG-tilted portfolio composed of equities and fixed income investments from companies that fit the entity’s preferences. For example, a custom-built ESG screen designed to remove fossil fuel companies from portfolios may be better suited for nonprofit organizations primarily focused on combating climate change, rather than for nonprofits concerned with social inequality. For the latter nonprofits, an ESG screen created to identify companies that fit established diversity and inclusion benchmarks would conform to their mission statements.
Furthermore, advisors can harness in-depth performance reporting tools to help boards of directors and officers of the nonprofits that the endowments and foundations are supporting better understand their portfolios. Using these reporting solutions, advisors should be able to break down an account’s various portfolio investments and income by asset class, strategy, manager and other criteria—and also comprehensively outline the performance of multiple accounts in a single report or statement.
Opportunities for More Meaningful Engagement With Endowments and Foundations
A robust suite of data and analytics can equip advisors with keener insights that can inspire stronger engagement with endowment/foundation clients, and empower them to demonstrate greater value. For example, fixed income, which had been used to reduce portfolio risk, has turned from a de-risking asset to a riskier asset over the past six months due to market volatility. Advisors can utilize data and analytics to help endowments and foundations (current clients as well as prospects) find ways to mitigate rising-interest-rate risk in their portfolios.
Also, advisors can show prospective endowment/foundation clients where they are likely overpaying for exposure in various asset classes. For example, some endowments or foundations that are paying for active management may not be outperforming benchmarks, and advisors that point this out can help endowments understand why they should retain them instead.
Don’t Let This Opportunity Pass You By
Independent advisors that do not possess the resources to build customized, data-driven solutions for smaller endowments and foundations can still tap into the pool of smaller endowments and foundations. Outsourcing investment management to a white-glove manager and private wealth consultant can give advisors the capability to effectively service the vast universe of smaller endowments and foundations in need of more in-depth, holistic advice—and do so at scale as their businesses grow.
Just like their larger counterparts, endowments and foundations with $50 million or less in assets under management are concerned about how geopolitical and market developments will affect the investment portfolios that enable them to survive (and do good). Independent advisors have an opportunity to provide them with the insights they need to maintain their financial security, while ensuring their investments adhere to their values. Don’t let smaller endowments and foundations—which can become loyal, long-term clients whose referrals carry weight—slip under your radar.
Michael Featherman, CFA, is head of investment consulting and distribution at Envestnet | PMC.