Nonprofits are one way to capture those multimillion-dollar portfolios.
Bob Siefert, co-owner of Back Bay Financial Group in
Boston, recently gave a fellow planner, Roy Komack, some words of
wisdom about competing for nonprofit money: "You are entering an arena
in which Vanguard is a chief competitor and is defining the fee scale.
Vanguard's standard offering for investment services, before it
recently removed this information from its Web site, was as low as
0.75% on the first $1 million, 0.35% on the next $1 million, and 0.20%
on amounts over $2 million. I don't know about you, but our fee model
doesn't dip that low that fast."
Komack, head of Family Financial Architects in Natick, Mass., had asked for Siefert's advice prior to making a presentation to a local Girl Scouts of America council-a pitch to manage a reserve fund of $3 million required by the parent organization to protect against adverse operating events such as the "cookie disaster" for which it had drawn down the fund in an earlier year.
Veteran planners like Komack are being approached by institutions with more and more opportunities that can be lucrative due to the sheer number of dollars involved. Komack was cold called by a local investment manager and Girl Scout council board member asking him to present to his committee a plan to manage the council's fund. Siefert's firm has had good working relationships with a couple of Boston legal firms that began referring institutional business to them. My own Washington, D.C., firm, which never sought out nonprofit business, was approached around 1988 by a local law firm that subsequently referred a nonprofit account that is still a client after 15 years.
Not all business comes serendipitously, though. You can go out and court it once you decide to include this market in your sights. That's what Pat Raskob does when she presents her nonprofit seminars at no charge. Part owner of Raskob/Kambourian Financial Advisors Ltd. in Tucson, Ariz., Raskob says, "We feel it's a community responsibility to assist our nonprofit organizations where we can, and have found we get individual referrals and [heightened] credibility from these activities." Raskob's business partner, Pat Kambourian, is president of the local Salvation Army board and was voted board member of the year in 2004-an award these principals didn't hesitate to publicize. The two "Pats" realize it takes time to cultivate these community relationships but, adds Raskob, "We regularly see people who were referred to us by someone who is connected to an organization that knows us or is aware of some community service we've been active in."
While getting most of his referrals from law firms, Siefert, says, "We've looked at becoming involved in the Association of Small Foundations for marketing purposes but, as advisors, we don't have membership rights there." Proactive efforts that have met with greater success are the philanthropic discussions Siefert and his team have had with some of their wealthier clients, in which they define the service Back Bay is prepared to offer and determine the client's interest in establishing a foundation.
But, as Siefert suggests, the competition can be stiff. "Vanguard drops its fees to 35 basis points ["bps"] real fast, so we can run into competition from them on accounts as low as $3 million to $5 million." The larger institutions don't seem to have a cutoff on the minimum account they'll compete for, notes Siefert. Which suggests advisors need to compete on something other than price, as Komack did in order to land the Girl Scout account.
"When we arrived to present our plan to the Girl Scout council, we piqued the committee's interest with a new approach very different from our three competitors," says Komack, whose approach borrowed from the investment strategy his firm takes with individual clients. "We proposed a heavier equity allocation than the 60/40 equity-fixed-income mix the council's portfolio had taken to date."
Why such a high equity mix? "They have an indefinitely long time horizon, and the account in question is a reserve fund designed to protect against adverse but uncommon events," answers Komack.
Many of Komack's individual clients keep 95% of their long-term money in equities; the council decided it liked an 80/20 mix. "Ours is a multiasset-class approach to building portfolios, much of it passive, using Dimensional Fund Advisors and some ETFs, with a few actively managed funds," he explains. "We broke down our recommended portfolio into specific line-item investments and showed them a correlation matrix. Much of our presentation, and some of our proposed asset classes, were new to them." For example, Komack included in the mix three alternative funds: Street Tracks Wilshire (RWR), a low-cost REIT industry index; the Arbitrage Fund (ARBNX or ARBFX); and the PIMCO CommodityRealReturn Strategy fund (PCRIX). The novelty of Komack's proposal, plus his attention to detail, sealed the deal.
Siefert's firm, which now manages a handful of institutional portfolios, succeeds by targeting accounts with noninstitutional trustees. "We started going after nonprofits when we bid on a small foundation with noninstitutional trustees. It turned into a very good marketing experience, because we realized we were really dealing with the institutional equivalent of an individual or family looking for high-touch service. When we were successful in landing that account, we decided to focus our marketing efforts on more small ($5 million to $50 million) foundation endowment market clients." Human trustees see the value in Back Bay's high-touch service-a competitive advantage that might be lost on an account with institutional trustees.
Roger Wohlner is an advisor with Asset Strategy Consultants in Arlington Heights, Ill., a firm he says is "huge in nonprofits." For one of his clients-a Catholic institution-Wohlner says, "It had terminated its relationship with a broker/wrap program, so we went in and competed hard against some good firms for an investment consulting role. It took the entity six months to decide who to go with, but it picked us."
What Wohlner did to differentiate his firm was recognize the social restrictions the client had on its investment activity due to its Catholic affiliation. "We were forced to go with separate account managers [in order to observe the client's restrictions]. We redid their IPS, adding the social restrictions to it, and got the account."
Sometimes more important than determining the institution's true need and gearing one's recommendations to it-as Wohlner did-is helping it to understand its fiduciary duty. "When dealing with nonprofits, I've found they may have a stockbroker on their board and may feel they've got to throw the business to the broker's firm. If you can get their ear on the fiduciary issue-their need to be a good steward of their funds-you can sometimes convince them the account shouldn't go to the broker just because he's on the board," adds Wohlner.
So David can slay the Giant by thinking outside the proverbial box. Sooner or later, though, it still comes down to fees. What do these advisors, who've had some initial though painstaking success in acquiring nonprofit clients, charge these entities? Wohlner typically competes in the under-$50 million market, though he says he'll go as high as $100 million. What does he charge clients in this range? "Sometimes it's more art than science. You have to look at the size of the portfolio, ask if there will be any social or other investment restrictions, is the client amenable to using hedge funds or other alternative investments, how many times a year will they want to meet-questions like that. The fee structure that works for us, though we might charge more if the situation warrants, is 50 to 75 bps on $2 million for a local account investing just using mutual funds; 30 to 50 bps on a portfolio in the $5 to $10 million range; and as little as 10 to 25 bps for accounts in the $20 to $50 million range."
In bidding for his Girl Scout council account, Komack charged his client fees similar to Wohlner's. "In our case, we don't know whether or not our fees were close to those of our competitors, but we didn't really care because we didn't want to compete on price anyway," he says.
Raskob's firm will charge 50 bps with a $500,000 minimum. "We take smaller accounts that others aren't interested in, and we also let the organizations know we'll aggregate fees under their umbrella so our fees will drop if they give us more to manage. For example, if the organization had $2 million with us, we might charge 25 to 40 bps, depending on their investment policy requirements," says Raskob.
All of which suggests that advisors' success in the nonprofit market will depend somewhat on the experience of those they market to. "We're given pause by the fact that many endowments will review the investment advisor relationship every year and, if they think they can get it better or cheaper, they'll put out RFPs annually," says Siefert.
Yet Komack's experience suggests institutions can be almost oblivious to the fees. "A local Unitarian Church, which I attended and for which I managed an account for five years, decided that no member of the parish should participate in the management of its investments," he says. "I resigned, its trustees did a search, and the church wound up with a broker at a big wirehouse charging it 2% a year."
David J. Drucker, MBA, CFP, a
financial advisor since 1981, sold his practice 20 years later to
write, speak, and consult with other advisors. His book, Tools &
Techniques of Practice Management, was released by National
Underwriters in December 2004. Please visit www.daviddrucker.com for