By Mel and Pearl Shaw
Editor’s note: Part one of a two-part interview with Leland Faust. Financial management and investing is critical to the sustainability of nonprofits. As a board member or trustee you have a fiduciary responsibility. But how do you fulfill that responsibility? What do you need to know as it relates to financial management and investment?
To get some perspective we talked with Leland Faust, the founder of CSI Capital Management. In addition to degrees from the University of California (economics) and Harvard Law School, Faust managed over $1.5 billion in assets from 1978 through 2011. Barron’s has named him four times to its annual list of top 100 independent investment advisers in the country.
If that’s not enough, Faust also has a long history of engagement with nonprofits, having served on the boards of diverse organizations. These include Maccabi USA and Planet Hope. We met Faust years ago when all three of us were involved with another nonprofit, Alive and Free, then known as Omega Boys Club.
The first question we asked Faust was about the impact Wall Street can have on the financial health and viability of nonprofits. Here’s his response.
“Wall Street can have a significant impact on the financial health of nonprofits. Charging higher fees than necessary obviously leaves less for the operations of the nonprofit. A quick example will illustrate this. If a nonprofit earned 7 percent per year on its endowment after necessary expenses, then $1 million of principal would earn $70,000 per year to fund its projects. If it is charged an extra 1 percent, then the annual amount is reduced to $60,000. Obviously this is a loss of $100,000 over 10 years. Higher fees generally lead to lower returns and do not correlate with higher returns on investment.
“Too often Wall Street encourages nonprofits to engage in more risky investing than is prudent. This exposes the nonprofit to greater risk of losing its principal and thereby jeopardizing its programs. CalPERS, the largest state pension fund in the country, provides a very recent example. For the fiscal year ending June 30, 2016, it earned approximately 0.6 percent while a conservative mix of stocks and bonds for the same fiscal year would have earned about 4 percent. This underperformance cost California at least $10 billion.”
We asked Faust for his thoughts regarding how a nonprofit evaluates risk. “In the CalPERS example they invested too much in speculative ventures like hedge funds and startup companies. It may be appropriate for a nonprofit to invest a small portion of its endowment in a wide range of risky assets, but the danger becomes unacceptable when the proportion is too high.” He encourages board members to look closely at the asset allocation.
Here’s the takeaway: Be sure to ask about the fees and risks associated with managing your nonprofit’s assets.
Faust’s new forthcoming book, “A Capitalist’s Lament: How Wall Street Is Fleecing You and Ruining America,” shares more information. It publishes Oct. 11. Preorder at Amazon.com.