Author Topic: Non-profit and socially responsible investing! I need some serious help here!  (Read 4596 times)

handsnhearts

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Hello to my wise Mustachians,
I am a very unknowledgeable (about investing) member on a non-profit board.  Unfortunately, I am one of the most knowledgeable people.  We(the non-profit) are considering investing with a managed, socially responsible investing firm that came with good recommendations from multiple sources, but now I am really gun-shy after learning so much about the dark under-belly of the finance world.  Basically we are sitting ducks.  Does anyone know of a financial planner that works mostly or only with non-profits?  Preferably for fee only and not for AUM.  Or of any one who mostly works with socially responsible investing?  We are interested in investing in alignment with our mission, but I am not convinced this is the best way to go rather than indexing. 

The company we are looking at has proposed this type of fee structure.  I don't understand this.  Is this in addition to any loading and transaction fees?

1.3% Management fee
0.14% custody and transaction fees
1.44% TOTAL annual management and custodial fees

Are the 12b fees only for annuities?

Thank for your help!  I have been reading jim collins' stock series, but it still seems way over my head. I keep diving in deeper and hoping that one day it will all make more sense.  Sorry if this is really basic level stuff.
« Last Edit: April 10, 2015, 01:42:35 AM by handsnhearts »

MDM

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Re: Non-profit and socially responsible investing
« Reply #1 on: April 02, 2015, 09:46:28 PM »
A couple of "springboard for discussion" links:
1) https://personal.vanguard.com/us/funds/snapshot?FundId=0213&FundIntExt=INT
2) http://www.flannelguyroi.com/case-against-socially-responsible-investing-sri/

In other words,
1) you could have a 0.27% expense ratio simply by putting the money into Vanguard FTSE Social Index Fund Investor Shares.
2) your non-profit will likely not earn as much (and thus likely not be able to do as much direct good) compared to "normal" investing.

Of course, investments can also lose money....

handsnhearts

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Re: Non-profit and socially responsible investing
« Reply #2 on: April 03, 2015, 08:43:06 AM »
MDM thanks for the links. I totally agree with the second argument, which is why I am trying to convince my group that we may need to go a different direction. I am going to contact Vanguard directly too. I think they do some management for a fee, and they have already committed to a fiduciary relationship.

I was trying to plug in to the calculators to demonstrate how much money would be sacrificed over time going this direction. We are looking at investing for the very long term, possibly like endowment long term. But the term of fees offered doesn't seem to line up with any of the investment calculators.

If anyone knows of a good person to talk to, I would be eternally grateful.

Chester Allen Arthur

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Re: Non-profit and socially responsible investing
« Reply #3 on: April 03, 2015, 11:36:09 AM »
As for socially responsible investing, the net effect is basically a small transfer of money from you to the people who are willing to invest in companies you aren't.  You're essentially lowering demand on morally questionable companies so other investors can get those stocks at a lower price.  Unless you have a tremendous amount of money to invest, somewhere in the tens of billions, you should stick with normal investing and enjoy that the profits from companies you may not like are now going to your charity so they can do good works.

Edit: or unless your charity is big and public enough that divesting yourself of some company stocks will be news.  A lot of universities have divested fossil fuel companies, and it's not really hurting the companies' bottom lines, but it's created a discussion that may lead to some actual change.
« Last Edit: April 03, 2015, 11:40:04 AM by Chester Allen Arthur »

Lyssa

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Re: Non-profit and socially responsible investing
« Reply #4 on: April 04, 2015, 05:06:58 AM »
I avoid mixing investing and charity. I avoid charities mixing the two.

Investing success is measured in profit after costs and expenses and charity success is measured in lives improved and suffering reduced.

Imho mixing the two leads to the same result as does mixing insuring and investing: Increasing expenses for the benefit of advisors and managers.

Furthermore: Both socially responsible as well as investing along religious rules have attracted and continue to attract fraudsters. They enjoy the extra protection that "being the good guy" and "doing the right thing" automatically gives.

Invest in index funds and do good with the proceeds. One of the most effective charities (the Bill and Melinda Gates Foundation) does exactly that. If it's good enough for two of the most business-sawy bilionaires it should be good enough for your small charity board.

handsnhearts

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Re: Non-profit and socially responsible investing
« Reply #5 on: April 10, 2015, 01:35:24 AM »
I want to understand better what these fees being charged actually mean? 

Here is from the investment company proposal...

Annual management fees (split between company X (40%), First Affirmative Financial Network (10%), and I assume fund manager (50%) = 1.3% averaged over stocks and bonds.
Custodial and transfer fees = 0.14%

Does this mean that company X is taking a financial advisor role and then recommending different products which are managed by the fund managers and this FAFN?
Who is charging the 0.14% custodial fees?

How do these fees relate to sales loads?  Are these on top of any sales loads?

Sorry, I am so new at this, and I am worried that people are rushing to make a poor decision.  I will also as the company proposing this these questions, but I want someone else's opinion who has no vested interest. 

handsnhearts

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Re: Non-profit and socially responsible investing
« Reply #6 on: April 10, 2015, 01:41:30 AM »
The company X has promised they are a fiduciary, there are no hidden costs as they don't have any particular products, so no 12b-1 fees.  They say they have a good track record and I am going to follow up with their references. 

I am in agreement about separating the good you do from the money you make, even though this is not a very forward thinking proposition.  I understand why it makes financial sense.  I am not looking for more convincing about this.  I and another committee member are working on this aspect to educate others. 

However what I need to understand is how these fees apply in the comparison calculators that look at expense ratios.  If I can show with cold, hard dollars how this will cost us hundreds of thousands of dollars over our lifetimes (not to mention if our non-profit lasts into the future beyond us, which it very well might). 

The calculator I am looking at now is this one...

Or are the above fees before any expense ratios?  Meaning, are these fees for financial advising only, and then fund fees are on top of this?  It seems like they are rolled in together, but maybe I'm wrong? 


I am losing sleep over this stuff...
« Last Edit: April 10, 2015, 01:43:14 AM by handsnhearts »

MDM

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Re: Non-profit and socially responsible investing
« Reply #7 on: April 10, 2015, 02:08:33 AM »
Annual management fees (split between company X (40%), First Affirmative Financial Network (10%), and I assume fund manager (50%) = 1.3% averaged over stocks and bonds.
Custodial and transfer fees = 0.14%
How do these fees relate to sales loads?  Are these on top of any sales loads?
Sales loads are one time.  These fees are ongoing (annual), and likely in addition to whatever fees are charged by the funds they select.

Quote
Does this mean that company X is taking a financial advisor role and then recommending different products which are managed by the fund managers and this FAFN?
Who is charging the 0.14% custodial fees?
Don't know - good questions for you to ask.

handsnhearts

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Thanks MDM!  THis is confirming my feeling that this is a messed up situation.  I am calling Vanguard's nonprofit division tomorrow for a comparison quote. 

Lyssa

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A stocks-and-bonds portfolio with no fees would give you 3-8% p.a. on average, depending on the exact asset allocation. There are different types of fees that could eat up all or part of this return.

Front loads are a certain percentage you pay for the priviledge of investing in certain funds, a lot of those loads are used to pay commissions for 'free' advisors. Basically you loose 5% of your investment right away and need 6 months - 2 years just to get back to zero. Do not pay this type of fee. Ever.

There are management fees which pile up on each level standing between you and the securities you are invested in. In the best case, those are below 0.5% for a decent index fund and Vanguard has options a lot cheaper than that. In the worst case, you are paying 1% per year to your personal advisor, after having paid 1% to a manager of a fund of funds (a fund picking and choosing other funds to invest in), after having paid 1.5% to the latest management stars of the funds your money is invested in. Because all those managers need to appear needed they are going to do a lot of trading on each level.

This trading does not come for free. Banks and stock exchanges charge fees for each trade.

Some funds are not satisfied yet and do take an additional fee for any especially successful year, in order to incentivize their managers. So you share the gains of any good year in the stock market with them. Of course, should a certain year go bad you assume 100% of the losses. And no, they will not factor in such loss when calculating next year's success.

If you do not understand what fees and expenses are involved with a proposed investment it is because the advisor/salesman does not want you to understand it. Do not reason or argue with them, they have been trained to give seemingly plausible answers and may even belief in those themselves. If you feel that something is not transparent and not being made transparent tell the salesman in question that you will think about it and come back to them if you are interested. You do not sound like a person telling them to go screw themselves, so walk away politely but do walk - or rather run - away.

Imagine what a front load, plus several levels of management fees, plus costs incurred by frequent trading will do to your annual return. There are illustrations of their devastating effect over on bogleheads.org.

Im not a U.S. American but from what I picked up over the last three years, Vanguard sounds like the best option for you and your board. If you feel better with an advisor choose one you pay directly and transparently. Only then will he work in your best interest. There are some of those guys active on the bogleheads board.
« Last Edit: April 10, 2015, 09:25:07 AM by Lyssa »

handsnhearts

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Lyssa,
Thank you so much for your insight and explanations.  I totally agree that if something isn't making sense, it may be a red flag.  That is what my gut is telling me right now.  Even though we all felt very positive after our initial meeting, later on, I had some misgivings. 

I am currently contacting company x's references, although I don't think this will reveal much.

I am also going to contact company x again myself, and ask some questions. 

In addition, I am going to contact Vanguard and see if they will work with us and make us a proposal.  One of the issues we have had is that our non-profit is too small to interest larger investment groups.  Most of them won't even talk to you unless you have a million dollars to place under management or more. 

Proud Foot

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@handsnhearts,

Does the non-profit have an investing policy? If so, does it say anything about socially responsible investing? If not, I agree with what the others have said that you are probably best off using Vanguard and putting it in an index fund.

It might also help to know what kind of a non-profit it is as well as what the how the funds are designated in the net assets (unrestricted, temporarily restricted, permanently restricted). This would always depend on the details of how they were given. Some of these things may make a difference on how you can invest these funds.

seattlecyclone

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As MDM mentioned above, Vanguard has a socially responsible index fund that targets the FTSE4Good US index. The expense ratios are a bit higher than VTSAX, but much lower than what this salesman is trying to sell you. I'm not sure what types of maintenance fees Vanguard charges for a non-profit to hold an account there, but I would hope it's pretty low if all you want to do is invest in a couple of funds and withdraw occasionally to pay for the charity's work.

dsmexpat

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I put together this ugly little spreadsheet to calculate the real cost of fees on a fund. The 1.3% management fee is high. I threw in some arbitrary numbers, 50k principle investment and 10k added each year, and it spat out 20k more lost through fees on the one they want than you'd lose in a cheap vanguard fund.

https://docs.google.com/spreadsheets/d/1OtzmhbCvdYoDtmwVA1clTHfYHY8JCQ88Mhfd5JJLY_M/edit

The return, principle, fee and annual investments are all unlocked so feel free to play with them.

Financial.Velociraptor

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You also need to talk to a tax advisor before investing inside a non-profit.  Most of the time, 501(c)# charities' tax exemption does not apply to investment returns.  There are ways around this (trusts) etc but that also adds more complexity and cost, while also reducing flexibility.

Agree with above poster you need an investment policy for the non-profit.  You might (might not) need to be bound to 'socially responsible' investments.  You might want to consider alternative avenues such as peer to peer and micro-lending to better align your investment with your mission.  You might need to consider very long lived investments (say if you are building an endowment) that invests primarily in very high return but long payback period assets such as productive farmland and timberland (Harvard University's endowment holds a great deal of timber land and has for centuries.)  Such investments are poorly suited to the RE crowd but make a lot of sense if your goals and financing needs are inter-generational.

handsnhearts

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thanks so much! 

I will look at the Vanguard fund, and play with the spreadsheet!  I love you all! 

We are currently working on an investment policy statement. 

I think the majority of the group are interested in the socially responsible investing to keep it in line with our mission.  I am starting to think intergenerational, but I think I am ahead of the rest of the group. 

We will definitely check with our CPA about the investment taxes.  I was also wondering about this. 

I did check the reference provided by company X, and I read the materials more closely as well.  The ED and I both have some questions.  The reference was very good and I do think company x is honest and will stand by their fiduciary duty.  The reference did have a conflict of interest, as he has investments with company x too.  In my opinion this is a good sign, as well as a potential bias because he needs to believe company x is competent, and working with integrity.  That said, the reference initially started working with company x when the company was volunteering.  Company x only became a consultant years later after an unexpected windfall made the reference's group need more financial work than a volunteer could reasonably do.  The reference was not affiliated with company x at that time, and only became familiar with them through their joint volunteer work.  So I do think this is a good reference. 

Vanguard also responded and they only use their non-profit advising with 2Million or more investment.  But they did suggest the concierge service it our investments are lower.  But we would need to manage them ourselves.  I feel like that could be ok, but I'm not sure others will be on board. 

Company x is a fiduciary, and doesn't sell any hidden fee products.  Neither does their network they are affiliated with.  They then go with a broker of Schwab or Folio.  Supposedly they have access to lower fees than if we approached these companies ourselves.  But company x is a financial advisor, CFP, CPA, as well as investment manager.  We would be paying for their advice and management, more than anything.  This may make sense for us as a group.  Even if it does cost money. 

I am going to have a follow up meeting with company x, and request the remainder of the references I had originally asked for.  I will keep looking for a comparable company for comparison.

And I will check out the other above stuff too.  Any further thoughts anyone has are very welcomed!