Non-profit organizations that are fortunate enough to have surplus capital beyond their typical reserves to meet daily capital expenses and expenditures for the next 12-24 months may consider setting up an investment account. This account could be designated for operational needs or a specific goal. When organizations get to this point, the next question they typically ask is:
“How do I find an advisory firm that will act in a fiduciary capacity to help grow the assets for the future of our organization?”
An appropriate next step for the organization is to create a Request for Proposal (RFP) and disseminate it to advisory firms who have a dedicated non-profit investment advisory division. This article will provide a framework of five important areas that non-profits should include when they are soliciting an RFP along with some items that should be addressed in each area.
1. What is the firm’s history, experience, and reputation?
- Gather basic information like the firm’s contact information, website, and list of consulting services offered.
- Ask how many years the firm has been performing non-profit investment advisory services.
- Who do they serve? Ask for a description of their client base, including the number of non-profits they currently have as clients, the length of time of service, and the range of asset values in this client segment.
- Ask for three client references applicable to this RFP whom you can contact. The firm should include their contact information and the length of time providing services.
- Is the firm registered with the SEC or a state securities regulator as an investment advisor? If so, have they provided all the disclosures required under those laws? Are they properly licensed and credentialed to provide the services as described in your RFP?
2. What is their investment process?
- Do they employ analysts within their organization that are responsible for investment manager research and investment performance evaluation? If so, how many?
- What is their capital market and economic outlook projections process?
- How is that information used to develop an investment strategy for clients?
- How would they assist your organization’s investment or finance committee in meeting the fiduciary responsibilities?
- Will they review and provide recommendations and help develop your investment policies?
3. Explain the service structure and accessibility.
- Ask the firm to provide biographies of the key consulting personnel assigned to your relationship. Inquire about professional designations such as CFA, CIMA, CFP, etc. Ask them to identify your main representative, share who would perform the analytical work, and who would serve as the back-up consultant when needed.
- Are there additional support professionals who would assist in this relationship?
- Is the firm a registered investment advisor under the Investment Advisors Act of 1940?
- Can the firm provide fiduciary services to its clients?
4. What does your performance reporting entail?
- What is the process for preparing and providing performance measurement reports?
Ask them to disclose the performance measurement software used and whether the software is proprietary or provided by an outside vendor. - What benchmarks are chosen or developed, and how is performance compared to similar portfolios?
- Request sample copies of portfolio reports that would typically be provided.
5. Disclose all fees and costs.
- Inquire about their investment philosophy and process for analyzing a client’s portfolio structure and the process for recommending modifications. How active is their management approach towards this portfolio?
- The firm should be willing to describe their fee structure and services included along with a breakdown of all fees and all various forms of compensation paid between and to all firms utilized (i.e. transaction fees, license fees, management fees, distribution [12b1] fees, and any other fees and expenses charged by various funds, investment managers, or investment firms that they employ).
- Do they have a minimum fee?
- Are there any other fees that apply in addition to investment management services? If there are additional fees as a result of performing services related to preparing or modifying investment policies, asset allocation analysis, or conducting manager searches, they should describe those fees in detail.
This is not an exhaustive list of items that non-profits should request from potential advisory firms; however it is a framework you can build upon. Each non-profit should tailor their RFP to their specific mission and objectives. Should you have any questions or wish to discuss them in more detail, please feel free to contact me directly.