SMAs can be used to attract foundation and endowment work.

    As more advisors incorporate separately managed accounts (SMAs) into their businesses, they also look for new and different ways they can use SMAs to take their businesses to a higher level. Although SMAs have always provided an entree for advisors wishing to enter the high-net-worth market, they may also provide an entry point to a lucrative segment of that market-foundations and endowments.
    Are SMAs a good fit for these organizations' investment portfolios? How can advisors use them to gain entry to this very lucrative segment of assets? This article will explore how SMAs are particularly suited to attract foundation and endowment accounts as well as how to approach them and the families who create them.

The SMA Fit
    "We think SMAs are very well suited for the small to medium foundation and endowment market," says Jeff Carlin, vice president of Schwab's managed account group. Such institutions have an even greater need than individuals for the customization SMAs can offer. "Not only can their mission be maintained in their work, but it also can be reflected in their investments by having their portfolios customized and tailored to their specific needs," adds Carlin.
    Schwab's trading platform includes 65 of the most common socially responsible investing (SRI) screens that managers can use to eliminate entire sectors as well as individual securities. But not all small foundations and endowments employ SRI; there are many causes a nonprofit institution may support. Regardless of the focus of the institution, SMAs offer the flexibility and restrictions needed for specifically focused portfolios.
    "When you look at it from the theoretical standpoint of what SMAs are designed to do, it's exactly the sort of business that managed accounts can support for advisors," says Craig Muska, director of business development at IW Financial in Portland, Me., an SMA-focused provider that provides extensive due diligence and research on the environmental, social and corporate governance performance of companies.
    The primary need of foundation and endowment accounts is to have an investment structure that supports the focus of the institution, according to Jason Pride, vice president and portfolio manager for The Haverford Trust Company in Philadelphia. "Many endowments or foundations have either outlays or incoming assets in the form of gifts, not in the form of actual cash. The transparency offered by SMAs allows these institutions greater access to information about what they own at a specific point in time so the manager can manage the portfolio around those incoming assets in order to better manage the entire portfolio."
    "The personal nature of the issues involved with philanthropy actually strengthen the relationship and serve as a good foundation for incorporating things other than baseline financial performance," explains Muska.
    For nonprofits focused on SRI, Muska says, "There's a very narrow definition in the investment world of what constitutes SRI-it doesn't have to be a prepackaged solution. SMAs provide a customized solution that's really designed to incorporate the client's values within the investment process. This is a new paradigm-providing research that leads to custom solutions for investors."

The Approach
    Independent advisors may have an advantage over large institutions in attracting small foundations and endowments as clients. "Larger firms may have a tougher time because of personnel turnover. Small foundations and endowments may get lost at larger firms because of their size. I think the barriers to entry are low," says Jane Abitanta, principal of Perceval Associates Inc. in New York.
    On the other hand, it can be much more difficult developing relationships with family clients than with individuals. "The relationship structure required by wealthy families is more complex than with individuals. Advisors should prepare themselves for long, long lead times. "You have to be willing to hang in there," Abitanta adds.
    "You can't just decide to go after the foundation and endowment market-it's not just another account to a family. It's a whole different thing," explains Muska.
    Two of the primary reasons families establish foundations and endowments are to establish a legacy for the family and to provide an educational venue for younger family members to learn to manage the family wealth. "You have to lose all notions of classic marketing when you're dealing with families of wealth," adds Abitanta. "Families are using private foundations for purposes other than the goal of the private foundation as an entity. It's really a family issue, not necessarily a philanthropic issue."
    Most family clients are business owners and, as such, tend to be on the boards of other foundations and endowments and to be active in their own communities, according to Linda Postorivo, vice president of MAFG RIA Services Inc. in Mt. Laurel, N.J., a subsidiary of The Beringer Group. "Their peer groups are very similar so they serve on the boards of various organizations of their friends, relatives, and associates in their own league."
    Family clients tend to spread the word about advisors who do a good job. "These are the clients to tap as a referral source," says Pride.
But asking for referrals must be done carefully. There are ways to ask for referrals that are not so clumsy. Advisors who already have provided solutions for endowments or foundations can state a desire to help other families in this way and ask if there are other people he or she should see. Working as part of a team of advisors for a family client can position advisors to add more value not only to existing clients, but also as valuable resources for clients of accountants and attorneys.
    "Private foundations specifically have to file at tax return called the 990PF," says Carlin, "so working in the same space with other advisors, such as accountants, can really help pinpoint issues that may revoke a nonprofit's tax exempt status. Same thing on the legal side-there are lots of ordinances and acts such as the Unified Management of Institutional Funds Act (UMIFA) and the Uniform Prudent Investor Act (UPIA) that can affect governance."
Asking to establish a mutual referral relationship is not necessarily the best way to go; the advisor's purpose should be to become a resource to support an accountant or attorney's business.  "The best thing for an advisor to do is to go in to a family or an organization with a very consultative approach," recommends Carlin. "Look to really gain insight into how the organization has gotten to its existing state. Then you can offer suggestions based on their viewpoint-this is probably the most accepted approach when dealing with these types of organizations."
    Muska adds, "Advisors need to take the time to understand what motivates a particular endowment or foundation. Is it personal? Is it strategic? Is there some kind of crisis looking to be solved? Or is it a combination of all three? The challenge for the advisor is to engage clients in conversations about their values and how they actively integrate that with their investment process."
    Abitanta says advisors need to know what a family's issues are and get educated specifically around what they need. Then, "it's about differentiation," she says. "What's unique about your investment management offering? What type of relationship are you willing to create and sustain with the family?"
    According to Carlin, the first step an advisor should take in attracting foundation and endowment business is to look at his or her existing book of clients. "They should go first to the clients who are most attuned to their approach from an investment standpoint and ask them if they are currently gifting money or currently involved in any eleemosynary organizations," he advises. "We've found that clients of advisors who have strong businesses providing high levels of advice are more than willing to introduce these advisors to the organizations with philanthropic needs."
    Pride disagrees and sees it another way. "If you're trying to see if families are going to be structuring foundations and endowments, approaching your current client base might work. But families who have already created these institutions represent a much larger portion of the market."

What Not To Do
    A definite no-no is to try to appeal to a charitable interest held dear by a family when the advisor doesn't share the same interest, says Abitanta. "People pick up on your lack of interest and you become kind of a carpetbagger at that point. And definitely do not try to go in and sell product as opposed to working in a relationship."
    Providing family education is another venue for attracting families with foundations or endowments. But just offering a seminar to family clients is a tip-off that the ultimate purpose is to sell them a product or service. Offering education specifically designed to address a family's needs directly addresses an important item on family's lists of criteria for working with an investment advisor.
    Independent advisors truly have the advantage here. Says Postorivo, "There are very few investment advisory organizations who truly do not have ties to money management firms or insurance companies." Complete objectivity is a high priority for families of wealth.
    According to Carlin, "Advisors who want to grow their businesses are looking for new services to provide high-net-worth clients. And foundations and endowments are looking for advice, and they're finding it in the independent RIA space." With the flexibility of SMAs and the low barriers to entry, the foundation and endowment marketplace may be the next frontier for advisors willing to provide the desired level of service.