The Year-End Investment Review for Nonprofits

Friday, 24 January 2014 Posted in SpringReef Insights

Seven Critical Questions You Need To Ask Your Financial Advisor

SpringReefA year-end investment performance review is vital to the financial stewardship of your nonprofit organization. Not only does this annual practice allow you to assess the health of your endowment or reserve fund, it also provides insight into the quality and effectiveness of your organization’s financial advisor.

A comprehensive year-end investment review should contain the following key elements:

  • An overview of your portfolio asset allocation as compared
    to your investment policy statement
  • An assessment of your financial performance versus appropriate benchmarks – overall and for each asset class
  • A summary of the total fees you have paid in the last year
  • A review of the year’s successes and challenges
  • A discussion regarding changes to your plans, investment objectives or to your investment policy statement
  • A written plan of action for the coming year

Unfortunately, given the opaque and sales-centered nature of the investment management industry, the quality of a year-end review can vary widely, often dependent on the experience, qualifications and interests of your financial advisor.

The good news is that with a bit of preparation, you can ensure that your organization gets the most out of its year-end review.
By knowing what questions to ask and informing your advisor in advance what you'd like to cover, you can greatly improve the probability of receiving a comprehensive, transparent assessment of your organization’s investment performance, fees and risk.

Here are the seven questions we recommend asking your financial advisor:

1. How does our investment portfolio align with our current investment policy?

  • Reviewing your portfolio for compliance with your investment policy statement is a key part of an annual review. First, confirm that your asset allocation remains within the boundaries specified in your policy. This is especially important in a year when there is significant divergence in the performance of common asset classes. Second, make sure that no prohibited investments have inadvertently been added to your organization’s portfolio – mistakes happen, and we have rarely seen one that has improved with age.

2. How did our portfolio perform, both overall and versus a blended benchmark1?

  • Your financial advisor should be able to provide you with a summary of your total portfolio return (net of all fees), as well as a comparison of your portfolio performance versus a blended benchmark. The data you receive should at the very least reflect a full-year period. For organizations with long-term advisory relationships, annualized performance from the last three and five years, as well as since inception, is preferable.

3. What were the underlying reasons behind our performance results?

  • Regardless of whether your portfolio over- or under-performed the blended benchmark, it is important to understand the reasons behind the outcome. Was the over- or under-performance broad-based or highly-concentrated? Was it an aberration or was it consistent with prior results? For added clarity in asset classes where there is significant variance from the benchmark, request that your advisor review the performance of each fund or manager against its respective benchmark.

4. What were our total fees this year, including advisory fees, mutual fund expense ratios, transaction charges, and fees paid to 3rd-party asset managers and custodians?

  • Transparency around fees is an industry-wide problem – all too often, advisors fail to disclose the multiple layers of fees their clients are paying. Be sure to ask for your ‘total’ or ‘all-in’ fee to get an accurate picture of your expenses. Also, since fees are often quoted as a percentage or in basis points2, make sure to translate what you’re quoted into actual dollars. For a nonprofit with a $25 million endowment, one-half of one percent may sound small, but converting the figure into its dollar equivalent ($125,000) will allow you to better assess your advisor’s value versus your total out-of-pocket cost.

5. How will organizational changes from the last year impact our investment management?

  • Changes to a nonprofit organization’s priorities, financial condition, donor expectations and spending plans can have implications for portfolio construction. Communicating these changes to your advisor is critical to maintaining appropriate symmetry between organizational goals and investment policy, asset allocation, risk and overall financial strength.

6. Are there any adjustments you recommend to our asset allocation or investment holdings?

  • If your advisor recommends a shift in your asset allocation or an adjustment to your holdings, make sure he or she provides you with a clear explanation. The foundation for changes to the portfolio can typically be attributed to a combination of three factors – those prompted by organizational circumstances, those prompted by markets, and those recommended by the advisor. Remember, for many advisors and firms, change drives revenue – verifying the reasons behind sales and purchases increases the probability they will be made for your benefit.

7. What is our roadmap for the coming year?

  • No year-end review is complete without a written plan for the upcoming year. Agree upon a roadmap with your financial advisor, both in terms of your investments and your communications plan, and ask to have it put in writing. At a minimum, we recommend quarterly updates and a formal annual review. Also, make sure your advisor understands your expectations regarding the content of reviews going forward. We hope the questions above will serve as a valuable guide in this respect.

1 A blended benchmark is a combination of appropriate indices weighted to match the actual mix of assets in your portfolio. It allows you to more accurately
and concisely assess the relative performance of your portfolio and the contribution of your advisor’s investment selection.
2 A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to
0.01% (1/100th of a percent) or 0.0001 in decimal form.

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