Fees

There are many possible investment expenses, and their range is considerable. Be sure to ask questions of your investment managers or your consultant; don't accept fuzzy answers; and make reviewing these fees a regular leadership activity. 

A Snapshot of Typical Fees

Created by Tony Oppenheimer of the Oppenheimer Brothers Foundation and Marshall & Ilsley (M&I) Wealth Management

  • Custodial fees—Paid to an institution (such as a bank) to hold your foundation's assets but generally not to manage them. Typically fees can range from 1-5 bps, depending upon your asset size, and even more if the assets include foreign shares.
  • Trading costs—Generated by buying and selling securities. Commissions can range up to 5 or 6 cents per share traded. For large trades of common securities by institutional clients, a brokerage house might charge a flat fee of $10 - $50. For more thinly traded stocks, clients may pay a "spread," or the difference between the bid and ask prices. Brokerages often embed these fees in the trade itself, so find out how much you're actually paying.
  • Professional manager fees—Levied by the people or institutions who manage your assets, whether in mutual funds or in separately managed accounts. These fees depend on the type of management (passive or active), sector, and size of assets. They can range from 10 to 175 bps. Management fees may be levied quarterly on the account or paid through an up-front or back-end charge (in the case of certain mutual funds).
  • Hedge fund fees—A special class of professional manager fees, paid to the managers of those lightly regulated, sometimes illiquid entities known as hedge funds. Often they charge a "2 and 20" fee, meaning an annual fee of 2% of portfolio assets and 20% of the profits generated by the manager.
  • Investment consulting fees—Paid to an independent consultant who proposes an asset allocation plan for your foundation and then objectively selects the managers or funds to manage the foundation's assets. Consulting fees can range from between 10 and 100 basis points, depending on the asset size and the range of services provided, and they come on top of investment managers' fees.

Options for Limiting or Reducing Fees 

  • Mutual funds—Mutual funds are the vehicle of choice for many smaller foundations. Advantages include ease of implementation, moderate costs, low thresholds for investment, and a huge selection of alternatives. On the downside, mutual funds must maintain a cash reserve to meet redemptions, and returns are diminished accordingly. In addition, costs tend to be somewhat higher than either separate account management or self-implementation. Finally, because contributions tend to pour into the funds during market highs and to be withdrawn during market lows, investors in mutual funds are often forced into a "buy high/sell low" scenario by the managers.
  • Separate account managers—Many foundations hire advisors to manage separate accounts on their behalf. Advantages include the potential for lower costs and negotiated fees; direct input to and feedback from the manager; and the potential for developing a customized portfolio. Many of the better investment managers do, however, have investment minimums ranging from several million to tens of millions of dollars. Moreover, even for those smaller foundations that are able to meet one manager's established minimum, diversification may be limited because the foundation endowment is not sufficient to meet the minimum for multiple managers with their various investment styles.
  • Self-selection—Many boards of small foundations are comfortable establishing portfolios by making their own investment selections. Advantages include flexibility to customize the portfolio and minimal investment expenses (assuming the individual or individuals involved work without remuneration). Disadvantages include a lack of expertise or experience, which may result in diminished returns; an inability or lack of time to deal with the sometimes overwhelming mechanics of the investment process, including custody considerations and recordkeeping; and a lack of time to monitor and review holdings, which may also result in reduced returns.
  • Use of a custodian—Smaller foundations or funds may choose to make use of existing relationships with the banks or other financial institutions that serve as custodians for their organizations. Because the foundation may already be paying the custodian for other services, it may be able to obtain competitive rates on investment management fees and other costs.
  • Community foundations and other pooled funds—Some community foundations offer investment management services to private foundations. Investment management fees are generally based on the type of fund that the family has and are sometimes negotiable. Although the investment choices available through a community foundation may be limited because of existing relationships with managers, community foundations that group funds with managers may be better able to meet minimum asset requirements, and thus may be able to secure lower investment expenses for foundations that use these services.

Resource

Controlling FeesUpdated by Canterbury Consulting