Bernard Madoff’s alleged $50 billion Ponzi scheme crushed many investors, hitting the Jewish philanthropic world particularly hard. While many charities are busy regrouping, deciding how they can continue to meet their needs with less money, donors are reevaluating how they give charity and questioning how organizations invest their donations.
Many donors feel burned, having learned through the news that their charities invested with Madoff. They don’t believe that their checks were a carte blanche for the institution to do as it wished with the funds; their donations were intended to help fulfill the institution’s mission, not swell its bank balance. About a year ago, I got a call from a mid-size charity looking for investment advice. The director asked me what they should do with the money they were collecting for their building fund. “Put it in a charity account that only buys treasury bonds, money market funds or bank deposits (CDs),” I suggested. He then explained to me that he had access to a special investment pool that always brings in around 10% per year with low volatility. Though I told him that I didn’t think he should go for something that sounds too good to be true, he dumped the whole lot into it. So much for the new building.
Special Charity Account (SCA)
Unlike endowments, where donors expect long-term money to be invested in a variety of different riskier investments intended to generate profits, SCAs handle short- to medium-term money with preservation of principal as the main goal.
The principles behind these accounts include:
Safety: Using mostly insured investments, SCAs allow the directors of charities and their donors to sleep at night. Even though the funds don’t have the potential for high yields, who cares? Charities aren’t mutual funds competing for the best returns. Generating profits should be the focus of investors, not charities. Let the private investors take the risks with their money and then donate the profits to the charities.
Transparency: An SCA can allow both the charity and the donor online access to see how the money is handled. One central problem with Madoff was that he operated under a shroud of secrecy. If he had used a large brokerage firm or bank to segregate and hold client assets, he could never have gotten away with all that he did, since the third-party custodian would have been responsible for printing statements and sending them directly to clients.
Liquidity: Rather than tying up cash in hedge funds, and instead of buying stocks that people are often loath to sell, SCAs hold assets in easy-to-sell positions, so cash is always available. And since the investments are liquid, the organization always knows exactly how much real capital is at its disposal.
Ease: With simple investments, charities can eliminate the costs, hassles and conflicts of interest that often arise with an investment committee.
If you are reeling fiscally or emotionally from the effects of the recent scandals, consider speaking to your favorite charities and your investment advisors about using Special Charity Accounts.
