The March 30, 2017, Financial Literacy Day program (see usfsm.edu/event/financial-literacy-day/) is designed to include a special session on charitable foundations and fiduciary roles, trustee responsibilities, investment committee oversight, and areas of concern. Also included in this program is specific discussion about how those who have stewardship over retirement funds can operate and exercise that responsibility.
We have personally witnessed situations in which poor investment management in philanthropic organizations has victimized beneficiaries and those who contribute.
Case Study #1. In this actual case, a prominent national charity had funds placed with Bernard (Bernie) Madoff. For years, the charity used that facility for some of their endowment fund. The charity had an investment committee that was responsible for oversight, in addition to a board and trustees. The charity had audited financial statements. They were actively engaged in fundraising and dispersing monies for their charitable purposes.
After the Madoff scandal was exposed, the charity promptly started a large fundraising initiative because they had “lost” money and needed to make it up. That initiative created a firestorm of discussion. The charity used the Madoff scandal as a reason to raise funds. It called upon donors and potential donors in hopes that the purpose of the charitable funds and “needs” of that charity would be appealing.
The charity failed to mention that they did not have the funds to begin with. They also did not disclose that they maintained the same auditor as they had used before the scandal, that they allowed funds to be placed in the custody of others, and that the same members of the oversight committee continued to serve, though they had repeatedly approved monies with Bernie Madoff and actually increased them over time. That same committee was still functioning as the charity’s investment committee in the wake of the Madoff fiasco. The charity failed to disclose to contributors that they took no legal action to recover monies from the auditor or to replace the professional staff, let alone the volunteers who recommended Madoff, approved his retention, or otherwise engaged in some form of supervision.
Case Study #2. In another instance, we watched a foundation take irrevocable title to the funds placed with it by another charity. The smaller 501(c)(3) sought out the help of the larger foundation in order to obtain what it thought would be assistance in performing administrative functions and generating acceptable investment returns. The smaller 501(c)(3) did not know that the funds it had placed with the larger foundation were in a pool that included all sorts of investments, such as those for which there was no market-based pricing system. These are known as Level 3 investments in the Florida philanthropic context.
The smaller 501(c)(3) endured marginal and questionable underperformance of its funds year after year. Ultimately, it had to negotiate the withdrawal of those funds from the larger foundation. That 501(c)(3) did not know that its previous leadership had entered into a contract that irrevocably placed those funds with the larger foundation. It took a negotiation and a settlement to remove them. The larger foundation would have faced extreme embarrassment if it had had to defend its behavior publicly from a lawsuit initiated by a smaller 501(c)(3).
Case Study #3. We have actually witnessed an investment committee member negotiate an investment structure, privately and surreptitiously obtain commissions, and share in fees from that investment. Subsequently, when the investment committee learned of this behavior with our help and prodding, they confronted him with the evidence, which he initially denied. After research and being “found out,” that member resigned. Revelations after he left disclosed embarrassing results including high fees, poor performance, and outcomes that essentially denied funds to the beneficiaries of that charity. Those funds are permanently gone. So is the perpetrator. Who suffered? The beneficiaries who were denied the proper investment return intended to further an organization’s charitable mission.
The March 30 panel on fiduciaries and trustees is designed specifically to talk about issues like this. Our panel of accomplished professional participants includes
David Berson, Senior Vice President and Chief Economist at Nationwide Mutual, whose role includes supervision and oversight of pension plans.
Michael McNiven, Managing Director & Portfolio Manager at Cumberland Advisors, who has a specialized role in researching 401(k) and 403B fiduciary responsibilities and has written about the new fiduciary standard issued by the Department of Labor.
David Fink, an accomplished and seasoned investment professional who has functioned in fiduciary oversight and advising capacities in the Sarasota-Manatee region.
Neal Colton was a Shareholder of Cozen O’Connor prior to his retirement concentrating on a broad range of corporate and litigation matters including serving as an expert witness on fiduciary duties of officers and directors as well as representing a plethora of diverse interests in international and domestic corporate restructuring, reorganization and insolvency matters.
Judy Hangartner, CPA, assistant professor at State College of Florida (one of the six schools participating in the multiversity and benefiting from a new Bloomberg terminal lab and the initiative in financial literacy and financial education), will moderate this special session on fiduciary and trustee roles and responsibilities.
Trustees, fiduciaries, investment committees, and pension beneficiaries, foundation staff, treasurers, financial consultants, and DONORS are welcome to learn, in addition to the academics representing the six institutions and their boards, trustees, and committees.
On Financial Literacy Day, Cumberland Advisors will also be dedicating a philanthropic gift, a 12-terminal Bloomberg financial laboratory to be housed at the University of South Florida’s School of Business. All six Sarasota-Manatee education facilities will be able to use these terminals. The integration of this Financial Literacy Day and the development of the 12-terminal Bloomberg laboratory at USF are intended to open up financial education and literacy to the entire community. The more we educate, the lower the chances that donors and beneficiaries of charitable organizations will be victimized.
The agenda includes a full day of discussions that will cover financial education, literacy, investments, outlooks, economics, fiduciary responsibilities, and a special section on financial issues for women. Bill Dudley, president and chief executive officer of the Federal Reserve Bank of New York, has agreed to keynote the day. Visit usfsm.edu/event/financial-literacy-day/ to register and view the schedule of events. This event is open to the public. All interested parties are invited.
Cumberland Advisors is now going into its seventh year in Sarasota. We are an independent, fee-for-service investment advisory firm. Our success has placed us in a position where we have clients in most of the 50 states and several foreign countries. We decided that our philanthropic gift was a way in which we could give back part of our success to the community that we now call home. We have 40 people, are employee-owned, and 17 members of our firm are investment professionals (series 65). We believe this is the largest concentration of portfolio management expertise in the greater Sarasota region.
April is Financial Literacy Month, nationally and in the State of Florida. On March 30th, we will help kick off this idea of financial education.
We hope to see you for Financial Literacy Day on March 30th at the University of South Florida.
