Donating to Community Foundations: Fiduciary Best Practices

Of the 700 community foundations in the U.S., 570 are members of the Council on Foundations. More than 425 of these have earned the National Standards Seal attesting to their conformity with the highest standards in grantmaking integrity and accountability. Among the National Standards to which community foundations must conform in order to earn the National Standards Seal is one requiring sound oversight and transparency of investment and spending policies. Oversight in the form of due diligence in the selection of asset managers and in monitoring their investment performance on an ongoing basis are important fiduciary functions that any prudent foundation will follow. For most community foundations with some four to six endowed and non-endowed funds to oversee, this will involve perhaps as many as 20 to 30 managers. So, donors and their advisors should be aware that the addition of one or more special funds, the assets of which are managed on behalf of the foundation by a donor's family wealth manager, significantly increases the fiduciary burden.

First, the community foundation is faced with increased due diligence to ensure that the selection of a family wealth manager is prudent and accords with the foundation's established manager selection criteria. Second, there must be an examination of any conflicts of interest the wealth manager may be subject to, taking into account in particular the wealth manager's continuing relationship with the sponsoring donor. Then, assuming that a wealth manager is considered satisfactory, the community foundation must ensure that the advisor's compensation is reasonable, recognizing that, were the donor's assets to be pooled with existing funds, the management fee would reflect the economies associated with managing a large pool of assets. Finally, the foundation must monitor and evaluate the wealth manager's investment performance on a regular basis. Repeating this process for multiple gifts generates a fiduciary burden of some magnitude!

To mitigate fiduciary exposure, community foundations should ensure that they have policies and resources adequate to meet the challenge, but they may also require a donor's wealth manager to submit to independent verification that it conforms to prudent practices. An advisor might consider seeking such verification of its own volition–in light of its own fiduciary obligations that arise in favor of a foundation–once a donor's assets are transferred to the foundation. These include putting the interests of the foundation ahead of those of the advisor and ensuring that investment management fees and expenses are reasonable from the foundation's perspective; perhaps justifying a reduction compared to the fees charged to the donor.

Fiduciary Responsibility for the Donor

Donors who sponsor their wealth manager to manage investments on behalf of the community foundation also assume fiduciary responsibility. While gifts are sometimes made with strings attached, such as naming rights or restrictions on causes to be supported, it is another thing entirely to burden a foundation with investment arrangements that expose the foundation to increased fiduciary risk. Therefore, donors also have an interest in verifying their advisor's conformity with best practices

In summary, donors and their advisors should be mindful of the fiduciary burden that they impose on a community foundation when they advocate for the advisor to be engaged to manage assets donors transfer to the foundation. Donors who desire to see investment of their charitable assets remain with a particular advisor should consider establishing their own family foundation as an alternative.

Roger Levy, LLM, AIFA, is CEO of Cambridge Fiduciary Services, LLC, a fiduciary advisor and audit firm with offices in Greenwich, Connecticut and Scottsdale, Arizona.