no longer content to stick to wealth management, registered investment advisers and multifamily offices are winning mandates from nonprofits. It makes sense that an asset management firm tending to the needs of wealthy families would also take on nonprofit clients. In many ways, managing multigenerational capital is similar to handling the assets of a charitable foundation or a college endowment, with long-term objectives and risk targets driven by ongoing financial obligations.
But the governance and regulation of nonprofits presents unique challenges. Besides contending with board- and committee-directed mandates, advisers must stay on the right side of state laws. Despite such obstacles, numerous rapidly growing U.S. wealth management firms are embracing this niche market at a time when investment performance for many small and midsize institutions employing large consultants and advisers has proven lackluster.
Independent RIAs will hold roughly 25 percent of the private client advisory market by the end of 2014, Boston-based research firm Cerulli Associates projects. But the wealth management community’s foothold in the nonprofit segment remains modest and focused on smaller institutions. With more than $3 trillion in assets up for grabs as of 2012, though, according to the Washington-based National Center for Charitable Statistics, the most sophisticated wealth managers are likely to keep building their presence.
Nonprofits have always relied on wealthy families as benefactors, so it’s a natural progression for the firm managing a family’s personal finances to also oversee those of its charitable endeavors. “We have had some institutional business from day one,” says Gregory Curtis, founder and chairman of Greycourt & Co., a Pittsburgh-based wealth manager founded in the late 1980s as part of the family office for a branch of the Mellon family. “Most ultrahigh-net-worth family relationships involved at least one foundation,” adds Curtis, whose firm has grown to some $9 billion in assets under advisement since the family office spun it off in 1990.
Curtis says he avoided pursuing institutional relationships outside his client base of families until about seven years ago, partly due to his experiences sitting on nonprofit boards, including serving as chairman of the endowments for the Pittsburgh Foundation and St. John’s College in Annapolis, Maryland. “The governance structure of nonprofits can be rigid, with a labyrinth of overlapping boards and committees,” he explains.
Many institutions used to fall into the trap of concentrating on relative results, which led to a focus on short-term returns, Curtis says. That changed with the financial crisis, he notes: “After 2008 many nonprofits began to focus on long-term returns instead of performance relative to peers.” Greycourt has since devoted more energy to the institutional marketplace; 20 percent of its assets now come from foundations and endowments.
Cynthia Koury, a partner with CM Wealth Advisors, has also seen a shift in nonprofits’ approach to engaging outside managers since 2008. “They appear more willing to allow their advisers to have greater authority to make investment decisions,” says Koury, who chairs Pepper Pike, Ohio–based CM’s investment committee and sits on the investment committees for the Sisters of the Humility of Mary and St. Paul’s Church in nearby Salem. CM started out in 1983 as a private investment office for the O’Neill family of Cleveland before expanding its business to other families. Today the firm manages more than $1.4 billion, with nonprofits accounting for almost a third of that total.
Advisers working with foundations and other 501(c)(3) entities often face hurdles unique to the individual client. “Acting as a fiduciary for a nonprofit can be significantly different from working with private investors,” says Arthur Hazen, president of Medallion Wealth Management, which manages money on behalf of institutions and wealthy families as well as creating bond portfolios for banks and credit unions. “There is significantly less flexibility from an investment standpoint when trying to reach the client’s goals and objectives.”
Hazen has worked as both an outside manager and trustee for endowments and foundations. In his experience, their investment policy statements may exclude certain strategies and asset classes. Values-based investment mandates add another wrinkle: “A cancer charity is likely to have provisions that prevent investment in the securities of tobacco or liquor companies,” says Hazen, whose Sewickley, Pennsylvania–based firm launched in early 2013 and has about $500 million in combined assets under management and advisement.
CM’s Koury has found that having nonprofits as clients can enhance an adviser’s wealth management franchise. “Many of the ultrahigh-net-worth families that we work with are essentially run by a single individual, typically the wealth creator,” she says. “We help them to create a governance structure within the family that can work to sustain the wealth for multiple generations in a manner similar to an endowment.”
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