There is “fragmentation” in the ever-growing private foundation marketplace, according to the chief executive of Diversified Trust.

There is “fragmentation” in the ever-growing private foundation marketplace, according to the chief executive of Diversified Trust, who outlined why the firm is bolstering its resources in this area.

“We think there is going to be further interest, at least in our area and demographics, on private foundation opportunities out there as there is a lot of creation in the sector for varied reasons,” Sam Graham told Family Wealth Report.

Diversified Trust is an employee-owned wealth management firm based in the Southeast, with over $5 billion of client assets under management. The firm’s clients include individuals, multi-generational families, family offices, foundations, endowments and retirement plans. It has offices in Atlanta, GA, Greensboro, NC, Memphis, TN, and Nashville, TN.

Graham highlighted that private foundations want, for obvious reasons, to focus their time on helping communities and exploring grant opportunities - without being burdened by administrative or operational tasks.

Indeed, a private foundation that was created by a matriarch or patriarch may well have a “governing document.” But there is also a lot of administration that goes into the running of a foundation, often fulfilled by having a CPA to file government forms, an investment advisor to manage the portfolio and a lawyer to advise the trustees, for example. Importantly, there needs to be a “mechanism to measure if a grantee used the gift in a constructive way.”

“That is several disciplines required, and many times we’ve found that they aren’t talking to each other,” Graham said. “There are a lot of layers, which, once peeled back, are required to run a private foundation well. We find families confused about whom to ask for certain things.”

There is also the potential issue of family members being geographically dispersed, as well as the fact that they may not share the same interests that the generation that created the foundation may have. 

“Communication and legacy consistency become really important,” Graham said. “We believe we have a solution, working with partners to provide a holistic approach.”

It’s an area for which he said the firm is going to “absolutely” expand its resources.

On this note, Graham said Diversified Trust’s services are designed to provide an outsourced solution to help foundations with their administrative functions, as well as which provides management tools, philanthropic advisory services and investment services.

“We do not offer tax and legal counsel, but we work directly with our clients’ existing advisors who do. Our goal is to help free up private foundations so they can focus on their mission, strategy and grant-making decisions,” he said.

Context: a “multi-discipline” approach

Pointing to a 2012 Foundation Center study, Graham said the following percentages indicate the amount of “unstaffed” private foundations who generally use a “multi-discipline” team of external professionals to help execute various functions: 47 per cent making annual grants of less than $3 million each year; 40 per cent ($3 - $5 million); 32 per cent ($5 - $10 million); and 17 per cent (between $10 and $50 million.)

“Even among the largest fully-staffed foundations, differences in giving levels, assets, operational styles, geographic reach, and programs vary dramatically and produce very different outsourcing expense situations,” Graham said.

He explained that independent foundations - like everyone else - were hit by the 2008 financial meltdown. They are “very sensitive to stock market trends,” given that their mandated payout levels are based on their net assets.

“Since giving and payout are driven by asset valuation in the preceding year (or over a few years), a majority of foundations reduced their 2009 giving after holding steady or increasing giving in 2008. Administrative expenses increased by double digits in this period, perhaps reflecting a delayed adjustment to five years of solid growth in foundation portfolios. When expense levels increase faster than giving, the expense portion of qualifying distributions increases. For staffed foundations, compensation is by far the biggest component of expenses,” he explained.

Compensation, he noted, represented 46 per cent of all charitable administrative expenses among the largest independent foundations between 2007 and 2009. 

Other expenses, he outlined, include professional services to ensure compliance with reporting requirements for private foundations, such as:

1.      Filing of Form 990-PF, which must report:

a.       All direct charitable expenses; and

b.      Any transfers to, and transactions and relationships with, non-charitable exempt organizations (such as trade associations or social welfare organizations) including loans, rental of facilities, performance of services, etc.

2.      Quarterly IRS filings and payment of estimated tax, Form 990-W;

3.      Annual filings required by state law;

4.      SEC annual information returns for very large holdings (over $100 million);

5.      Special IRS notice requirements for reporting a dissolution or substantial contraction of a foundation;

6.      Foundations with unrelated business income must file Form 990-T (income from debt financed investment property and certain publicly traded partnerships are examples). The Form 990-PF also has a section on income-producing activities.

“Questions about how much foundations spend on staff, overhead, and other administrative expenses including outsourced professional services - and how much is appropriate to spend - are a perennial focus of policy debates on foundation practices,” Graham said.