Nonprofit organizations face unique challenges when investing their funds. Unlike for-profit entities, nonprofits must balance financial returns with mission alignment. Investment fees charged by financial managers can significantly impact net returns, so nonprofit boards must carefully negotiate these fees. This article will examine key factors in negotiating investment fees for nonprofits. With tighter budgets, nonprofits must scrutinize all expenses, including investment fees. However, investment returns are also critical for funding programs. Nonprofits must find the right balance between fees and returns. Proper oversight and fee negotiation will lead to optimal investment performance. We will explore important considerations around nonprofit investment mandates, fee structures, and fee negotiations.
Importance of Customizing the Investment Mandate
Nonprofits have distinct investment objectives compared to other entities. When negotiating investment fees, the manager mandate must be customized for the nonprofit. Investment managers for nonprofits must consider both financial returns and mission alignment. For example, some nonprofits may restrict investments in certain industries like tobacco, alcohol or weapons manufacturing. The mandate outlines investment goals, risk tolerance, asset allocation, restricted investments and other guidelines. With a customized mandate, the nonprofit can better evaluate manager performance. It also provides criteria to negotiate fees based on the complexity of managing assets within mission constraints. Nonprofits investing reserve funds, endowments or charitable trusts will have different mandates. The investment manager should work closely with the nonprofit to tailor the mandate to their specific situation before negotiating fees.
Understanding Fee Structures of Investment Managers
Nonprofits should understand the typical fee structure of investment managers before initiating fee discussions. Investment management fees generally have two components – a base fee and a performance fee. The base fee is a percentage of assets under management, often ranging from 0.5% to 1%. Performance fees are based on benchmark outperformance and generally range from 10% to 20% of excess returns. In addition to management fees, expenses like trading costs and custody fees are incurred. The nonprofit should ask detailed questions on full fee disclosure. Investment consultants can advise nonprofits on norms for fees based on portfolio size, asset classes and managers under consideration. With this background, the nonprofit can better assess the reasonability of proposed fees.
Developing Appropriate Fee Negotiation Strategies
When negotiating investment fees, nonprofits should develop well-planned strategies. Assessing comparable fees charged to similar clients provides negotiation leverage. Offering managers access to new donors through event speaking engagements or newsletter highlights provides value. Multi-year fee schedules with declines over time reward manager retention. Tying performance fees to appropriate benchmarks ensures fees are earned through skill, not market returns. Considering overall service levels like reporting and client service guarantees value for fees paid. Partnering with pro-bono investment consultants strengthens oversight and negotiating power. Educating managers on the nonprofit’s mission and community impact can lead to reduced fees. With thoughtful approaches, nonprofits can secure reasonable investment fees balanced against returns and services.
Negotiating appropriate investment fees allows nonprofits to optimize net returns over time. By understanding fee structures, customizing mandates, benchmarking comparables and using planned tactics, nonprofits can secure fair fees. This enables investment performance to fully support the nonprofit’s mission and community programs.