Working with not-for-profit clients

By Jayson Forrest - Managing Editor  - IMAP Perspectives

Working with not-for-profit organisations can sound attractive, but it comes with very distinct challenges. Alex Pikoulas CFA (Lipman Burgon & Partners), Greg Barter (Findex) and moderator, Greg Miller (Wealth Market), share their views on not-for-profit clients.

According to Philanthropy Australia, the not-for-profit (NFP) sector in Australia is large and diverse, with more than 600,000 NFP organisations, including approximately 5,000 trusts and foundations nationwide.

With such high numbers of NFPs in Australia, it is of little surprise that many advice businesses view these charitable organisations as potential clients. But working effectively with NFP clients requires a different approach to individual retail or high-net-worth (HNW) clients.

This was the collective view of Findex senior partner, Greg Barter, and Lipman Burgon & Partners CIO, Alex Pikoulas CFA, who both shared their insights of working with NFP clients at an IMAP webinar on ‘Building a wholesale, HNW and not-for-profit client base’.

“When you’re working with NFPs, you’re fundamentally working with a group of people who are the decision-makers but not the asset owners, which is different from retail or HNW clients. And the makeup of those NFP decision-makers does tend to change quite regularly, as Board or committee members come and go,” says Greg.

“This means you have to be aware that while you may have agreed on the goals and investment objectives with the NFP, changing stakeholders may bring with them new ideas, which may require the adviser to continually reinforce what was originally decided by the client in their investment policy.”

It’s a view shared by Alex, who agrees that the process of providing advice to both retail and NFP clients, like aligning their investments to match their objectives, is similar, but adds there are also some significant differences.

“The biggest difference is governance,” says Alex. “That’s because you’re advising people within an organisation who are not the owners of the assets. That’s why it’s critical to get the investment policy statement right and get agreement on it with all the stakeholders.

“So, you need to work with them to clearly articulate what the objectives are of the wealth management piece for the organisation, what the targets are, and who is responsible for what. By doing so, the investment policy statement will help to bring everyone onto the same page.”

Alex also adds liquidity management as something to consider to ensure the NFP has the appropriate liquidity it needs with its investments, while budgeting is also an important piece of the advice process for clients.

A common problem that Greg has encountered when working with NFPs is the failure of some organisations to have clear investment objectives.

He explains: “If you don’t have a clear and detailed discussion with the organisation early on about their objectives, then you’re likely to encounter problems later on. That’s where advisers can provide guidance in helping an organisation set up its goals and objectives.

“You also need to understand how much risk a client is willing to take in order to achieve their objectives. And while you’d think that perpetual entities, like NFPs, would have the capacity to take on a little more risk, the reality is they are often risk-averse.”

Both Greg and Alex agree that as stakeholders and Board members on an NFP change, it becomes essential that continuity with the investment portfolio is maintained. They believe the best way of ensuring that is through the organisation’s investment philosophy, which is best articulated through the investment policy statement. And while this statement may evolve over time, it won’t change as often as the Board members.

“The investment policy statement is a ‘constant’,” says Greg. “When you have new stakeholders or decision-makers coming in, they bring with them their ideas. But if you refer back to the investment policy, then that statement becomes the best way of keeping everybody on-track with their investment strategy.”

It’s a view shared by Alex: “In a situation where you have multiple stakeholders, you need active involvement in the investment policy, otherwise, you’re just opening up the process to disagreement. But if you have a clear investment policy that was agreed to by the stakeholders, you can always refer back to that, particularly with new Board members. You need buy-in by the Board because they are the fiduciaries of their organisation.”

As part of its portfolio management process, Findex prepares annual forward income estimations, which are used by its NFP clients to work out what projects they can or cannot commit to for the year. These estimations assist clients manage their planning during periods of market volatility, like COVID-19.

“When markets go sideways, like during a pandemic, it isn’t necessarily the capital base that NFP clients are particularly worried about. But of the few clients that were concerned about the market downturn, their concern was predominantly about how they were going to fund their charitable activities or projects,” Greg says.

“For example, some clients were reliant on income raised through their conferences, which were cancelled last year. So, they looked to their investment portfolio to fund their activities. As such, we find NFPs are more sensitive to a sustainable level of drawdown, more so than what the actual capital value of their portfolio is.”   

Alex agrees that liquidity management is very important for NFPs. That’s because these organisations have committed spending to activities and need to ensure that the liquidity is there to enable that spending.

But he also adds that NFP clients tend to be less emotional in their decision-making during times of market stress. Why? “Because it’s not their personal money,” he says.

“They are fiduciaries and being a fiduciary of the money means there is greater appetite to avoid losses, and therefore, there is less likelihood of them becoming emotional about those losses. In fact, during COVID-19, we saw less propensity from NFPs to lock in losses and de-risk portfolios at the wrong time.”

Interestingly, Findex treats its NFP clients as retail, which means taking clients through the normal retail process of providing advice. Greg adds that one of the most critical elements of this process is setting the client’s risk profile.

“It often ends up being a problem if you don’t go through that process of setting risk parameters, particularly when markets aren’t going so well,” he says.

But Lipman Burgon & Partners takes a different approach with its NFP clients. As a business, its clients are predominantly wholesale. By treating clients as wholesale, it enables the business to provide these organisations with other investment options that are wholesale-only. However, Alex adds that the business services all its wholesale clients as if they were retail.

“This includes how we communicate with them, as well as undertaking the various steps you are required to go through from a retail regulatory perspective. That’s because it’s good practice to do so,” he says

When it comes to tips for securing a successful NFP tender, Greg cautions that the success rate of actually winning a NFP tender is lower than with average clients, and requires a considerable investment in time and work to achieve. Instead, most of the NFP clients at Findex are the result of referrals. 

“Tenders are tricky because every tender document asks different questions, so it’s not a process you can easily template,” says Greg. “The tender needs to be tailored to the client’s needs and the most critical part of achieving that is to absolutely insist on spending time talking to the decision-makers beforehand.

“By doing so, you will be able to properly scope out their objectives. We’ve found that written briefs and documents often don’t give you a clear indication of what the client actually wants, so you need to actually talk to the client.”

From Alex’s perspective, the key to a successful tender is trust.

“It’s all about how you, as an adviser, can make the job of Board members easier,” he says. “You need to be able to show the client that you’ll be all over things like budgeting, communication, drafting and maintaining the investment policy statement. It’s all those sorts of items that are very important for NFPs. They need to trust you to do the job.

“If you come across as a business that can be the most helpful to the client, while providing the least risk to the Board, you’re more likely to be successful with your tender.”

Alex adds that while there are many advice businesses interested in the NFP space, they first need to understand that while perhaps less time is spent on the relationship aspect of the arrangement, more time is spent on administration.

“As a client, NFPs are intensive but it’s a very different service offering to a retail or HNW client, requiring very different things you need to spend your time on.” 

<sub>Fee structure

Like any advice client, there are a variety of fee options available for NFP clients, ranging from a flat fee structure to percentage-based fees.

Lipman Burgon & Partners enters into a commercial arrangement with its NFP clients, with fees charged being similar to HNW individuals and families. And while the business does have some larger clients on a fixed fee arrangement, the NFPs tend to be charged on a sliding scale percentage fee.

Findex typically charges a flat advice fee and a percentage fee for portfolio construction and management. But due to the size of its NFP clients, Greg has a personal policy where he tries to discount his advisory time, meaning he often waives the advice fee.

“Generally, we charge our NFPs a percentage fee and this fee is slightly lower than an individual’s fee, because I’m treating part of that fee as pro bono.”

As a business, Alex says Lipman Burgon & Partners always tries to charge sensibly, and probably charges slightly lower than the average market rate.

“If you’re sensible about your fees then it’s not going to be a point-of-difference for you when you’re pitching for new NFP business,” says Alex. “You have to be realistic in what your services are worth and price appropriately. We’d prefer to win business on good service, while being priced fairly for both parties.”

Ask Greg about the level of interest in ESG and ethical investments, and he will tell you that the interest in these investments by NFPs is much higher than individual retail clients. It’s an area of interest, he says, that has been growing for the past five years.

“NFPs are leading the push in demanding SRI and ESG options as part of their overall investment portfolio,” he says. “In fact, when we develop an investment policy for these clients, we specifically ask them about what investments they want to exclude, which might conflict with their philosophy as an organisation.”

Alex agrees: “ESG and ethical investments is something that needs to be included in the upfront work when you’re putting together the investment policy statement. We also encourage clients to have an ethical investment policy, or at least consider whether they should have one, and to align that policy with the beliefs and culture of the organisation.”

For an advice business to be successful in the NFP space, Alex believes the key point to remember is that you are advising fiduciaries who are not the actual asset owner. He says if an advice business is aware of that important difference, then it is one-step closer to working successfully with NFPs.

“Like any client, you need to advise the client in a way that is appropriate for them. And it’s no different for NFPs. There are some specifics around NFPs that are appropriate for them that are different to individuals and families,” Alex says.

Greg’s advice is to remember that working with NFPs is less about personal relationships and more about professionalism in what you do.

“It’s absolutely critical that you undertake a very deliberate process in going through and developing an investment policy. And an important part of this is taking the time to really understand the objectives of the organisation, and tailoring that in the policy. That’s where effective communication with the Board members becomes so important.”    

Alex Pikoulas CFA is CIO at Lipman Burgon & Partners; Greg Barter is Senior Partner at Findex; and Greg Miller is a Director at Wealth Market. They spoke as part of an IMAP webinar on ‘Building a wholesale, high-net-worth and not-for-profit client base’.