January 05, 2009
How Small Foundations Can Protect Themselves From a Madoff-Style Scandal
Is it too expensive for small foundations to undertake the due diligence necessary that would have protected them from falling prey to a Bernie Madoff-style Ponzi scheme? Jack Siegel, writing at Charity Governance, doesn’t think so.
In response to a query from a reader of his blog, Mr. Siegel provides a list of low-cost steps family foundations can take to avoid losing money with an unscrupulous investor.
First, people with relatively modest assets, in comparison to other wealthy donors, should reconsider the decision to set up a foundation. If the costs of maintaining a foundation are too high in comparison to assets, than perhaps it’s a better choice to create a fund with a community foundation or a donor-advised fund, writes Mr. Siegel.
Family-foundation leaders also need to understand how their money is invested. No matter how trendy an investor, if he or she can’t explain the investment strategy, it’s unwise to put your money with them, according to Mr. Siegel.
He reminds readers that hedge funds aren’t the only option, to consider using a custodian who is independent of an investment adviser, and to diversify one’s investments.
There are also investment advisers who specialize in serving small foundations, writes Mr. Siegel. The Commonfund and the Investment Fund for Foundations are two options.
What do you think of Mr. Siegel’s advice?
—Caroline Preston
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What Jack Siegel has written on his site and what you have referenced here is very similar to what advice I have been sharing with my clients (www.dexterityconsulting.ca).
Other options for families thinking about starting their own foundation is looking within their community. Most major centres have Community Foundations of some sort. Connecting with them can be an easy entry into the foundation world. As well, Canadian philanthropists can draw resources from the Philanthropic Foundations Canada (http://www.pfc.ca/).
There are many other ways to invest in community. Articulating what you are trying to accomplish with your charitable investment (your vision) is always the first step.
— Gena Rotstein Jan 5, 03:29 PM #
While I agree with Mr. Siegel’s comments, I still think he is overlooking an important area for small and large foundations and nonprofit organizations. This is a clear investment policy created by the board or controling body of the organization. Choosing an investment advisor isn’t enough. There were many advisors fooled by Madoff. We work with our clients (www.candelasolutions.com)to create policies, procedures and training to empower THEM to ask the right questions and have a sense of control over their investments.
— Amy Borun Jan 5, 07:18 PM #
I guess I’m not seeing the correlation of ‘the advice’ to the Madoff-style scandal. The recommendations here would have done nothing to protect anyone. Nothing. Absolutely nothing could have warned off any body or any organization from getting destroyed in the Madoff scheme. I recommend you watch, over and over again, the c-span televised House of Representatives beginning interogation of SeC reps that was on TV today, 5 jan, and an individual, who had been a investor of madoff for 21 years, who lost everything. His $2 million, his life savings, and at 76 years old, he is likely to loose his house. When you see the ‘evil genious’ of Madoff, and the monthly reports he sent his ‘clients’, very few saw — maybe just one, that one cool guy who kept writing to the various ‘oversight’ agencies — it for what it was.
— Roberta d'Eustachio Jan 5, 07:57 PM #
I believe madoff had investment discretion as well as custody of the investments. Most community foundations maintain separate custody of their investment accounts. The investment manager may buy and sell within those accounts based on guidelines established in a written investment policy statement but they should never have the authority to make withdrawals or transfers.
— Steven Schloenbach Jan 8, 01:57 PM #