How a Nonprofit Found Stress-Free Investment Management: A MEDIQUS Client Case Study

Matt Paprocki, JD, CFP®, VP of Institutional Services

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To be a thriving medical nonprofit, you want confidence that your reserve funds are invested wisely and that they’re being carefully monitored. You can’t afford to jeopardize accomplishing your financial goals—by sacrificing return potential or having your resources tied up in a potentially risky investment strategy.

With that reality in mind, check out what happened when one medical nonprofit reached out to MEDIQUS. 

Their experience is a prime example of how our thorough, hands-on approach brings stress-free investment management to the clients we serve.

How and why we met

When this particular nonprofit began working with a Chicago-based association management company, someone there suggested, “You should get MEDIQUS to review your reserve fund investment strategy.” (NOTE: The association management company was familiar with our team because we advise several nonprofit clients they serve.)

The leadership at the nonprofit was intrigued by this idea of “seeking a second opinion.” They were curious to see if they were getting maximum benefit from their investments and from their investment-advisor relationship.

The nonprofit asked us for a full proposal and review. They wanted to know in detail what we do and what services we provide to groups like theirs. They were especially interested in performance—how other clients’ investments had performed, and how their own investments were performing—but we wanted to also illustrate how the entire advisor relationship should perform to meet the needs of the organization.

So we took a deep dive. Here’s what we discovered.

What we discovered

In our extensive review of the organization’s investments, we found five areas of concern:

1. They had a broker, not an advisor. 

The first thing we noticed is that the organization really didn’t have a financial advisor—they had a broker

What’s the difference? 

While both are financial professionals, advisors focus on providing financial guidance in a wide range of areas in a client’s best interest, whereas brokers primarily concern themselves with executing financial transactions. 

Here’s why that can be problematic. 

Financial professionals make their money in different ways. (That’s what’s disclosed in the fine print of those financial emails and brochures you get.) Many advisors—MEDIQUS included—provide fee only services to nonprofits. That is, they only charge nonprofits a pre-stated fee; often a percentage of the money they manage. 

Brokers, on the other hand, are compensated for recommending and executing transactions. They can get a commission from the investment companies when they convince a client to buy shares of a company’s funds. 

Obviously, this commission arrangement can create a conflict of interest. 

Brokers may have a financial incentive to steer clients toward the fund companies that will compensate them instead of other funds that might better suit those clients’ investment goals.

Because this nonprofit had a broker and not an advisor, they had a number of such “conflicted” investments. 

That’s not all we found. Digging deeper, we discovered a second, related issue…

2. They had limited investment options.

This nonprofit owned shares in about 10 different mutual funds; however, seven of those funds were with one fund company. While not an issue in-and-of-itself, it contributed to the conflict we’ve discussed.

Even though it was (and is) a widely-respected, global company, this conflicted approach was limiting the nonprofit’s investment options. In short, the broker’s preferred investment company didn’t offer certain investment options that other fund companies do—options that might have been better suited for a nonprofit.

Why such a concentration of investments with one company? Again, this might be explained by the fact that the broker was financially incentivized to convince clients to put their money with the fund company that was compensating him.

An advisor should be aware of and familiar with a broader range of funds. And with more choices, the nonprofit may find investment options that fit better with its organizational and financial objectives.

But there was even more cause for concern…

3. The funds they were in were “pricey.”

In our consult with the nonprofit, we asked, “What are your current investment costs?” We were interested in the costs of the funds themselves. In our review of the funds in which the nonprofit was invested, we found relatively high internal expenses.

What do we mean by “internal expenses”?

A mutual fund works like this: It essentially takes investors’ money and uses those funds to purchase a diversified portfolio of stocks, bonds, or other securities. Obviously, to do this well, there are costs involved in buying and managing those investments. 

Companies have to do constant, careful research. They have to pay salaries, keep the lights on, and pay other administrative expenses. So, there are always some internal costs associated with purchasing shares of a mutual fund. 

If it’s an active fund—one that’s buying and selling frequently to try to avoid market dips and time stock upticks—the cost for investors to participate can be really expensive—like 1% to 2%.

Looking at this nonprofit’s entire portfolio, we saw that they had an internal expense of 0.8%, which we felt was on the higher side. The internal costs of the funds we recommend typically runs about 0.1%.

In short, in addition to the commissions, this medical nonprofit was paying high internal expenses, but there was more…

4. Their investments simply weren’t performing well.

To add insult to injury, some of the nonprofit’s “pricey” mutual funds were underperforming. They weren’t keeping up with, much less outpacing, the standard benchmark for investments in those categories.

So, not only were their investments expensive, they were subpar when it came to performance.

And our final finding?

5. Their investments were exposed to more risk than most nonprofits are willing to take.

We looked closely at how diversified the nonprofit’s portfolio was.

How much did they have in stocks, bonds, and cash?

Within those categories, we looked at how much stock they owned in large U.S. companies (e.g., the S&P 500) vs. small companies (e.g., the Russell 2000 index) and others.

How invested were they in international companies, both large and small? We did a similar review of their bond holdings.  

Of course, every nonprofit wants maximum return potential from its reserve fund investments. But you can’t afford to be too adventurous and risk the value of your nonprofit’s portfolio. As fiduciaries to an organization, a board’s goal should be to maximize return while maintaining an appropriate amount of risk. That involves a delicate balancing act.

What we found was that for a nonprofit, they were exposed to higher risk than they needed and would benefit from being more diversified.

What we reported

After our careful review, we met with the organization’s board and gave them a two-part presentation. 

Part one was an overview of the unique relational approach we take with our clients—and the specific services we offer medical nonprofits.

The approach boils down to a simple formula:

Investment Consulting (investment strategy, fund management, cash flow, and spending oversight)

+ Continuity Coordination (investment and spending policy implementation, fiduciary best practices, coordinating board turnover)

+ Relationship Management (frequent reporting, consistent communication, donation, and contribution best practices).

Part two involved walking them through the list above—the concerns we found when we reviewed their portfolio. 

While there was nothing alarmingly inappropriate, we could tell their board: “You’re not getting the financial guidance you deserve. Your current investment options are limited. And you’re paying more than you should be paying—and getting a subpar performance on some of your investments.” 

Finally, we told them, “Your portfolio could use more diversification. You’ve got a lot of stocks relative to your bonds; it’s a higher ratio than what we typically see with nonprofits. You may be taking more risk than is responsible for an organization like yours. We believe we can help you reallocate your investments so that your portfolio is better balanced, so that it better aligns with your desire for returns and risk.”

What they decided

Based on our thorough proposal and review, the nonprofit hired us.

Interesting side note: When the organization’s leadership informed their broker of this decision, he warned them about all the capital gains taxes they’d be forced to pay if they sold some of their investments in order to change their investment strategy. 

(Again, because he was a broker and not a financial advisor, he apparently wasn’t aware that nonprofits don’t pay capital gain taxes on the sale of stock!)

The benefits of this partnership

Since working with MEDIQUS, what has changed for this nonprofit?

  • It now has access to engaged advisors, not simply a transactional broker relationship. 
  • The organization’s investments are more diversified (and it enjoys a broader range of investment options).
  • Its investment costs have decreased.
  • The group now has a revamped investment policy statement that proactively guides current and future leadership.
  • The nonprofit has any time, hands-on guidance for how to handle excess cash or charitable donations.
  • They get frequent, comprehensive, easy-to-understand updates.

One board member described the group’s relationship with MEDIQUS this way, “There’s such a difference between what we had previously and what you bring to the table. That’s not only on the investment side of things, but in the thoughtful way you answer our questions, handle assorted details, and keep us updated on everything.”

Maybe it’s time you got a “second opinion” on your medical nonprofit’s investment strategy. 

Our mission is to provide medical nonprofits with stress-free investment management.

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