Dan Danford, MBA, CRSP®
Family Investment Center
For sake of discussion, let’s say your favorite charitable organization has an endowment of $10 million. You’ve likely got a Finance Committee and a paid manager (or two) for the portfolio. In most cases, your performance is probably okay, and you don’t harbor any strong dissatisfaction with the current arrangement.
Still, there is an ongoing duty to invest wisely and safely, and to exercise proper supervision over the funds. Also, the current economic climate demands maximum effectiveness for every resource used by the organization.
The matter’s crux is this: every one percent of investment return brings $100,000 to your bottom line. Boost the returns and you boost the organization’s mission. More money for scholarships, or services, or other client support.
I’m going to mention the most obvious solution. The investment manager(s) needs to do a better job. If they’d choose better stocks or bonds, or mutual funds of stocks and bonds, resulting performance would create the desired new funds. If they can’t do that, maybe it’s time for a change.
That’s uber-obvious, and it’s where most boards go. And, for the record, it’s also where many investment professionals go, too. Banks, advisors, brokers, they all make claims and they all support those claims with believable documentation. Most will send out a team of sparkling professionals who are charming, articulate, and knowledgeable.
But it’s problematic, too. They all look good. And they all sound convincing. But – this is the serious flaw that most investors won’t touch – no one (and I mean absolutely no one) knows exactly what the future will hold. All those groups with all their expertise are merely guessing about the future. From this standpoint, the notion of adding an extra one percent through better investing is highly speculative.
There is another way, though, and it offers an almost-certain performance boost. If you take the existing portfolio and slash fees for trading, mutual funds, or portfolio management, those reductions flow directly to the bottom line. Want to boost portfolio returns by $50,000? Simple. Find a safe and insured custodian who won’t charge high fees to hold investments and send verified pricing and reports.
Need another $25,000? Find a way to shift some portion of the portfolio to index- or institutional-share managers. Either choice can reduce overall portfolio management costs by an easy quarter- or half-percent.
And there is no need to sacrifice performance. First, many existing managers will discount costs when pushed, but even if they won’t, there are hundreds of qualified companies who will. Here’s just one example: we can show you how to hire the widely acknowledged “nation’s most prominent bond investor” (New York Times, 2001) for a microscopic .46 percent per year. The best in the U.S. For your endowment portfolio. For less than one-half percent per year.
No firm you interview can offer that kind of quality for close to that price. And that’s just one example of one portfolio segment. We can show you similar savings though stocks, international investments, real estate, and other diversification realms. Virtually no reduction in quality; a serious and non-speculative reduction in fees. Instant boost to your bottom line.
One more thing. The returns from slashing fees are permanent. Unlike chasing investment performance, they bring increased returns to the bottom line in each and every subsequent year.
Why haven’t you heard this discussion before? That’s a great question, and one I’m pleased to answer. The simplest response is that fees are easily obscured when times are good. Rising markets and general prosperity hide a lot of sloppy practices. No one worries about an extra half-percent when investment returns run ten percent a year.
But the queasy combination of low returns and economic crisis has changed all that. Throw in greater industry transparency and we’re seeing a lot of things not discussed before.
There’s another point worth making. The rise of independent investment advisors is creating a lot of competition and pricing innovation. Firms like Family Investment Center have been around for decades, but technology and information are transforming them into investment powerhouses. Today, registered investment advisory firms are the fastest growing segment in the investment industry.
There’s no magic bullet for higher performance. And there’s no crystal ball about likely investment returns for 2011, 2012, or 2013. But there is a safe, reliable, and convenient way to boost portfolio returns and mission success. We’ve been doing it with top charitable groups in this region since 1998.
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