INTRODUCTION: Welcome to the Bryn Mawr trust wealth management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jennifer Fox, president of BMT wealth management.
JENNIFER: Hello everyone. I’m here with Elizabeth Wagner, who’s the director of institutional wealth management at Bryn Mawr Trust. Elizabeth works with endowments and foundations on all philanthropic matters including governance and spending policies. And quite candidly, our topic today, which is forever is a long time. So Elizabeth and I had a chance to touch base on this topic and really think about what’s the purpose of an endowment or a foundation, which is where the title came from, is a forever as a long time. So Elizabeth, tell me about kind of the title and your thoughts about that.
ELIZABETH: I like talking about forever because whenever I sit in front of an investment committee, we ended up talking about what they know best and often, especially for smaller nonprofits, their investment background comes from investing for themselves and their families and their thinking in terms of one generation or maybe two. But endowments don’t retire and they don’t die. And for most nonprofits, the idea is that the endowment lives forever and is a source of vitality and rejuvenation. And so not only does it have to survive, but it has to grow. And so those challenges around how do you think about investing with an endowment lens with a constantly looking forward, multi-generational investment horizon, um, are real challenges. And so I always insist on talking about forever with nonprofit boards because it makes so much sense to separate this from the kind of investing that they might think about in their personal lives or even in their professional lives if they’re working with individuals and families as we do.
JENNIFER: So if I’m a trustee on a philanthropic board, or perhaps even in an endowment, what are some of the things that I need to really be thinking about or paying attention to in that forever mindset?
ELIZABETH: So first I would say, remember that you are a fiduciary. And so the first thing is, it’s not my money. I’m accountable to myself, to this organization, to all the trustees of the future. And if it’s a strong organization with a significant endowment and you hope that line goes on forever, I’m accountable to all of those people, um, for, for good management and being thoughtful about the environment we’re in and how we can protect this organization’s a strong suits forever. One of the things we talk about a lot, um, in endowment management is these are special dollars. We sometimes talk about the George Orwell’s 1984 some pigs are more special than others. Some dollars are more special than others. And charitable dollars are those dollars because there’s so hard to raise. Most endowments are built out of very specific gifts, often bequest, often from the most important that an organization has. And so that requires a special kind of care on the part of a nonprofit trustee. And so first we say, remember, you’re a fiduciary, then remember, you’re beholden to all of the trustees of the future. Then remember, you’re beholden to your donors who have created this. And so once you feel the weight of all of that responsibility sink in, I think it’s a little easier, um, to start to think about what responsible, thoughtful investment management looks like when you’re thinking forever into the future. And I think the first big questions are, um, when you think about what you want this endowment to accomplish over time, what is its role for the organization? Um, are you in a place where you are relying on an annual payout? When I talk with trustees, I often talk about the discipline of managing an endowment. And I mean that not only in terms of managing the endowment itself and the investments within it and your investment advisor, but also about how you’re going to use the money once it flows into your operating budget. And I recommend that, um, all organizations with endowments do take a draw every year. And here’s why. We saw this in um, in 2008 particularly organizations that had, had endowment that had been doing very well and hadn’t taken a drawn a couple of years, got to the end of 2008 and said, gosh, we are having a very difficult year and we didn’t take a draw last year or the year before or the year before that. So how about we take maybe 10 or 15% Fisher just to make up for what we didn’t take last year. Their portfolios had already suffered a hit. They were taking another 10 or 15% before you know it. Um, the endowment’s half the size it was last year. And so the discipline of both managing the endowment well and making choices about your spend policy and sticking to them religiously, whether it’s a good year, a bad year or something in between. I think it’s really key for nonprofit trustees.
JENNIFER: So as I’m hearing you thing that seems like there’s two key parts in working with an endowment and a foundation. The first is the investment side and I’m sure that there’s some recommendations on best practices on the investment side as well as the spending side with good recommendations there. So how about we start with the investment side and what are some of the key recommendations that you have in taking that a hundred plus year view? Um, since that’s probably his forever is I’m going to see or think about, but what are some of the things that are key to get that process started and things to focus on?
ELIZABETH: So it all starts with your investment policy statement and um, if you don’t have one now is a good time to start to build one. Um, all nonprofits that have even a, even a little reserve fund should have a policy about what’s going to happen with that money. And what you see in organizations with very substantial endowments is a very thoughtful policy. You sort of start with the key questions. Whose job is it to manage the investments? Is it the board’s job? Are they delegating to a committee? If so, is it a finance committee? Do you have enough talent to have a specialized investment committee that could really think deeply about the investments? Do you have enough assets to have an investment committee? I think one of the challenges is, I spoke not too long ago before an investment committee that was managing $400,000 and they had four meetings a year and they were 90 minutes long. And I, I’m not sure how they filled the time. I think it’s really important to think about scale and what’s the best use of your volunteers time. But so define who’s making the decisions. Um, define how those decisions will be managed. Will the investment committee vote on them? Will they make recommendations and the board will vote on them? So that’s the first piece. But the governance in place, um, secondly is define a basic asset allocation. And to do that you have to think about what job the money’s going to do for you if your endowment is designed just to provide operating support for the long haul. That’s one role. We’re seeing more and more flexible, um, endowment like funds now from nonprofits. And they sometimes don’t have that hundred year timeframe. Sometimes they think will in in our lifetime, we’re not expecting to be able to make a big move, but we have a plan for the next generation or two. So sometimes you invest a little differently depending on that horizon. So then after after put the governance in place is define your horizon, then think about asset allocation to match your horizon. Then start to think about some of the, um, the mission related issues. We’re seeing more and more endowments foundations and philanthropists who are, who are running their own small endowments, talk specifically about wanting to match up their investments with their mission. And if that’s important to you, that’s something to talk with your investment advisor about and look for opportunities to get that second bottom line in your investments. So I would say from the standpoint of basic investment policy statement construction, that’s where you start.
JENNIFER: So good governance, really thoughtful, uh, analysis of time horizons and asset allocations to match. If I’m summarizing that, there’s a lot of good information inside that and a lot of good thinking that’s required. But as we mentioned earlier, the investment side is how you grow those dollars very thoughtfully. Um, but the next thing is really spending policy of how do you use those dollars really thoughtfully and effectively? And how do you even think about what the budget looks like?
ELIZABETH: Those are hard questions for nonprofits sometimes too. So the first thing I would say is take a good hard look at at what you determined is the mission of this money. If it is especially going to flow into your operating budget and you have a hope that it will last forever, you have to be really realistic. When we talked about some dollars are more special than other dollars, I always start to talk about risk, right about there. Um, these are dollars that you’ll want to protect from downside risk. And so that will impact your return. You will take a little less risk because these dollars are harder to get. Um, and your returns maybe will lag the markets in some ways that seem very reasonable because you’re trying to protect them. And so think about that, that continuum between risk and return and have a thoughtful conversation with your investment advisor about what you really can tolerate. But I often, um, talk to people about is that sense that um, spend policy is defined by two things. One, the needs of the organization, um, and to the discipline that you want to build into your investment committee or finance committee or whoever’s running it. And a lot of times there’s a, there’s sort of a push pull in there, right? Um, one side really wants to limit the intrusion into the fund every year and the other side says yes, but if we only could spend a little bit more, we could do more good work. And they’re both right. And so for most organizations it’s simple math. Realistically, given that you’re protecting these dollars in ways that you might not protect other dollars, what is your expected return over the long belonged term? And when I say the long term, I mean 10 years. Um, look at the fees that you are paying. Think about inflation and the sum of your expected payout, your expected fees and your best guess about inflation should be a little bit less than your expected return if you want this to grow over time. And a lot of nonprofits now we’re really struggling with having had expectations of being able to take a six or 7% annual payout and realizing that something more like 4% is a much safer choice in this environment. And those are hard conversations in their heart, especially for the staff when the budget depends on flow from the endowment every year. And so these are where I’m really good planning I think comes into play and really frank conversation between that push pull of staff and investment committee.
JENNIFER: So when you look at the endowment dollars, uh, and you’re looking at spend versus return, how often do you need to review this? Especially since we’re talking about that this is forever. Um, at what point should you make shifts or adjustments in either your investment policy statement or your spending policy?
ELIZABETH: So those are great questions and I want to just expand it a little bit to say, um, I, I used to work with um, an investment committee that was really interesting. I used to compare them to the supermodels from the eighties and nineties who wouldn’t get out of bed for less than $10,000 a day. They absolutely refused. They were such a disciplined group. They refuse to get excited about a quarterly return and whether a particular manager was doing spectacularly well or terribly in any one quarter didn’t interest them at all. They were very focused on that 10 year return number because they realized forever as a long, I’m not interested in evaluating our performance on a minute by minute basis. I really need to think about the long term. And so every conversation I ever had with them, it was about the 10 year number. And I think that is so helpful when you, when you think about how do I start to frame these conversations around how, when should I make changes? Is the asset allocation durable for the longterm? Generally speaking, most organizations, once they said an asset allocation are going to stay there for decades. And within that, um, I usually say, look at your investment policy statement carefully. If, if you’re under say about $50 million in terms of your endowment and the vast majority are every time you grow five times revisit the investment policy statement, right? So if you started $1 million and you end up at five, look at the investment policy statement. Again, if you look around the room at your investment committee and no one remembers the last time you looked at the investment policy statement, do it again. Um, I usually recommend every, every 10 years for the larger organizations, every time you double, those are times when your scale might change and you might really need to change your approach. But I think the discipline of endowment investing is thinking about that longterm. And the key is not to make sudden dramatic moves, not necessarily to react to the current market conditions and instead to really think about why did we make these choices for the longterm. And given what we know today and what we know about the way markets behave historically are these choices that we made in the past likely to hold true over the future term. And if you think forever, as a long time, you used the historical data you have before you make changes to your ips.
JENNIFER: So let me ask a different question in the sense that as I’m listening to the endowment conversation and kind of the spend policy of a foundation or an endowment, how, how does the conflict between a normal operating budget, uh, work that may be funded with ongoing donations, how should that work be, uh, of the interaction between a spending budget and endowment budget and, and what makes sense from a contribution perspective?
ELIZABETH: So those are hard questions. Let’s separate out the foundations of that, that are trying to make grants and that probably are not actively growing year by year from the institutions that are still fundraising actively. And let’s start with the foundations. So on the foundation side, I find some really interesting trends about foundations that are making grants, um, and that have had most of their assets already gifted to them and then are not expecting to get any more really big gifts of some different considerations. Many of them have grantees or programs that really depend on them, um, in years that are difficult. They may want to do a little bit more for some of their grantees than they have been able to in the past. And those are the same years that their endowments may take a little dip. And so for them, what I often recommend is, set your spend policy in a way that you’re comfortable with for the longterm and then think about what other options there might be that would help you manage those years where the market is not kind your organizations and programs that depend on you are really struggling and you actually want to do more even though your payout is less. And, I worked with a foundation for many years that kept align of credit and they had not tapped it, which was interesting, but they had thought really hard about what will we do if there’s a year when we do not want to make changes to the investment portfolio, but we do want to give more. And so their solution was look outside the portfolio, you know, the line of credit was secured by the portfolio. Um, but it was an interesting solution to a complicated problem for a foundation that thought it was not going to grow. If you are a nonprofit and you think you may grow over time, the best solution you have to that tension between the operating budget and the spend policy is really good fundraising staff. And I think that the challenge there is that gifts to endowments tend to be longer term gifts. They tend to be the donors who know you best, who trust you most and who’ve been there for a long time and often their bequest gifts or other kinds of planned gifts. So a lot of times receiving a gift into the endowment that substantial means that one of their biggest cheerleaders has died. And that is, that’s really hard, right, for fundraising organizations. So build up that plan giving program.
JENNIFER: So as a trustee of a foundation, what else should I be thinking about? Because I’m thinking fiduciary duty, I’m thinking, um, I’m continuing to think about how long forever is, I’m thinking about the investment policy statement, spending policy statement perhaps, and also thinking about that dynamic between operating budget and spending. What other things should I be thinking about as a trustee in really managing the growth for the long term?
ELIZABETH: A couple of things. I think composition of the investment committee is so important. It should not only be investment professionals, many investment committees are comprised mainly of people who would like to have the business that the organization’s investment advisor has. That doesn’t lead to really terrific work on the fiduciary side. Most investment committees that are highly functional and really able to do the work well include a mix of people who are professionally equipped for this. And then who may also have a personal experience that gives them good judgment. For example, I have seen a number of investment committees that include attorneys, accountants, doctors, one recently that included a surgeon who was known all over town just for his general goodwill and good judgment and he was a generalist. People use to second opinions from him even though he wasn’t a specialist in anything in particular because they really trusted his judgment and he was a terrific fit for that investment committee because he helps them see the big picture and he did not get lost in the details, which sometimes people who do this for a living see more clearly and so I think one of the challenges is really manage that committee composition. Make sure you have professionals who come from all kinds of backgrounds, all who are well equipped to make decisions but who might not spend all of their lives in the minutiae of the pool. Secondly, I would say make sure your organization is tracking donor intent. Most gifts that build up and endowment come with some kind of indication from the donor about their expectations. We live in a more litigious society every day. Many nonprofits have found that they, they have to make choices about how they apply the money that comes from their endowments and they, um, they would be well advised to know what the money was supposed to do before they decide how to spend it. And then the last thing I would say is really, really work on gift tracking and the mechanics of fundraising and make sure that the future pipeline is very, very strong. Those are the things that over time will make for a strong lasting, thriving endowment and a strong lasting, thriving organization.
JENNIFER: Elizabeth, thank you so much. This was a really fact billed podcast with a lot of good advice, uh, especially for many of our friends and colleagues and clients who are trustees on endowments and foundations. So thank you.
ELIZABETH: Thanks for having me.
CLOSING: This has been a production of Bryn Mawr trust. Copyright 2019 visit us online at bmt.com/wealth the views expressed here in are those of Bryn Mawr Trust as of the day recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT wealth management provides products and services through Bryn Mawr Bank corporation and its various affiliates and subsidiaries, which do not provide legal tax or accounting advice. Please consult your legal tax or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not. Bank deposits are not FDIC Insured, are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.