The Importance of Endowments: Building a Stronger Organization with Smarter Asset Management

by Robert I. Evans and Avrum D. Lapin

While every vibrant Jewish nonprofit today should pay attention to building a strong endowment, some organizations have approached the process through two concurrent (and compatible) philosophies: seeking more philanthropic support as the primary objective and, at the same time, developing ways to reduce costs and enhance investment strategies. Both are important, we believe!

Endowments are a critical venue for institutional funding, and can provide the type of permanence that creates the space for and fuels innovation. At organizations where a robust endowment provides financial stability, leadership are unleashed to “think outside of the box” and consider opportunities, as opposed to always scrambling just to “make ends meet.”

As we witnessed during the Great Recession of 2008-10, nonprofits that had established endowments are now looking to increasingly sophisticated financial strategies to help grow and sustain those endowments. As Wall Street propels forward, even more fresh perspectives about asset management are important, and they serve to reshape the financial picture for many nonprofits and their endowment programs.

The Jewish Federations of North America Investment Institute, taking place this month and created in 2001, provides a unique forum to bring together Jewish Federation and Jewish foundation investment committees, chief financial officers, endowment professionals, leading financial service providers, and academics to share best practices and better understand the critical marketplace trends that impact financial performance in today’s ever-evolving economy. This meeting of experts – both volunteers and professionals from across the U.S. – highlights conversations many are having about un-duplicating resources and fostering cooperation.

EHL Consulting was recently able to speak with Alan Leifer, of Boston, and Michael Horvitz, of Cleveland, co-chairs of the 2013 JFNA Institute. Both actively involved in the Jewish philanthropic community, the duo offered us much “food for thought” on the topic of asset management and best practices for properly stewarding endowments.

They predicted that one “hot topic” at this year’s Institute will be the concept of smaller organizations “outsourcing” their financial management tasks to larger organizations, a strategy that has grown out of the idea that organizations that manage smaller endowments benefit from the best money managers when cooperation is programmed.

“The benefits to pooling assets and outsourcing are that they allow investment committees to think about the things that really matter,” Leifer said, affirming that outsourcing can free up volunteer talent directed for other priorities.

Another advantage can be seen on the macro level. According to recent studies, the Jewish community collectively manages more than $65 billion worth of assets. Stewarded properly, these assets could generate an additional $5 billion a year in incremental philanthropic funds. If “a rising tide lifts all boats,” the implication for smarter money management in Jewish endowments is that new strategies could result in billions of dollars flowing back into a variety of Jewish organizations, enabling Jewish nonprofits to better serve a range of Jewish causes.

“Proper endowment management results in investment returns that actually dwarf things like annual campaigns,” noted Leifer. “If we’re talking about the national average for Jewish annual campaigns growing to $1 billion per year in the next several years, the corresponding projection for investment returns is sized to return $5 billion per year. It’s a very important evolution!”

Unchecked, the costs of managing endowment growth is very high. It is estimated that the 3,000 organizations managing investments for the Jewish nonprofit community are paying money management fees upwards of $500 million per year to Wall Street. To reduce these expenses would make an immediate impact on organizations requiring dollars.

“A larger investment pool divided among a smaller number of managers gives more leverage in negotiating with financial providers, and really enhances the direction of the discussion. By pooling assets there’s market power, and there’s a higher return. There are a lot of potential advantages.”

Whatever strategy Jewish nonprofits choose to employ, one of the most important areas to focus on is the growth of their endowments, period. As consultants to nonprofits of all shapes and sizes for many decades, we constantly receive questions about what represents an “adequate” size for an organization’s endowment. Our steadfast response often shocks nonprofit professionals: today’s best practices dictate that a nonprofit’s endowment should exceed optimally five times, but at least three times its operating budget.

For an endowment to be most effective in providing financial security, it must be sized proportionally to the organization’s operating needs, both present and future. One of the troubling factors today is that too many nonprofits are not considering this crucial ratio, and instead focus only on their current operating needs. However, at EHL Consulting we believe that all nonprofits must be prepared for the next downturn in the economy, and the best way to do so is to responsibly grow and safeguard endowments.

Jewish nonprofit volunteers and professional leaders must commit to continually evaluating and growing their endowment programs. Donors that make endowment gifts expect that the funds will be managed well, and will therefore be available for years to come. By continually reviewing investment policies, regularly assessing investment allocations, and engaging in professional development to ensure that financial best practices are being utilized, Jewish nonprofits can responsibly build their endowments to a size that will benefit their constituents for years to come.

Robert I. Evans, Managing Director, and Avrum D. Lapin, Director, are principals of The EHL Consulting Group, a fundraising consulting firm located in suburban Philadelphia. They are frequent contributors to eJewishPhilanthropy.com. The EHL Consulting Group is one of only 38 member firms of The Giving Institute. EHL Consulting works with dozens of nonprofits on fundraising, strategic planning, and nonprofit business practices and strategies. Learn more at ehlconsulting.com

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