Professional service firms are experiencing greater demand for their skills in providing strategic funding advice and asset management solutions to not-for profits (NFPs) whose boards want better returns than those offered by traditional fixed interest. But dealing with more growth orientated investments has placed greater responsibility on CFOs who are responsible for overseeing this function and the associated compliance obligations.
“The NDIS [National Insurance Disability Scheme] is forcing a lot of health orientated NFPs to transition away from cash investments,” explains Scott Girdlestone, a director of the Sydney-based Wealth Advisory practice of William Buck. “This makes a lot of intuitive sense; the challenge is how to optimise overall returns, preserve capital, improve cash flow to meet the organisations liabilities, as well as building the organisations overall wealth”.
The low interest rates on offer over the past three years and the gradual roll out of the NDIS has meant these NFP boards have to work harder to sustain their existence and survivability. As the responsibility for finding those solutions falls to CFOs of those organisations, who may not have the necessary investment skills to run portfolios under a tougher governance framework, the focus has turned to outsourcing investment management.
“There is a lot more demand for it,” Girdlestone notes. “We have had a lot more enquiries, especially as governance is becoming more onerous in the NFP space. In some cases, particularly health focused NFPs, this is occurring due to the change from a granting model to an activity based funding model paid in arrears, which is putting pressure on treasury operations.”
Firms like William Buck provide advice on treasury governance via the appropriate investment policy for an NFP, developing an overall funding strategy, asset consulting and portfolio management.
As Adrian Frinsdorf explains, it is time consuming for a CFO to seek the best return from multiple financial institutions. A former broker and now a Director of Wealth Advisory in William Buck’s Adelaide office, Frinsdorf’s team recently took on the outsourcing of an NFP’s $10 million portfolio. The before and after experience of the CFO of that NFP illustrates the new challenging environment finance officers face.
If the board had charged the CFO with investing the $10 million ten years ago, the CFO could have given part of the capital to a stockbroker who would have invested in what they considered appropriate equities, and/or invested a large proportion in fixed-interest investments earning as much as seven or eight per cent. As inflation was running at a little more than two per cent, the board would have been satisfied not only with protecting its capital but also watching its earnings grow to meet future asset replacement needs or growth plans.
However, in the past decade, interest rates fell to around two per cent, matching the inflation rate of about two per cent. In this case, the CFO had split the $10 million between 14 different banks. On the fall of each maturity date, the CFO had to negotiate the new interest rates. “He was running around chasing the banks,” Frinsdorf says.
Additionally, the CFO had other pressures of both a governance and practical nature. Did the investments meet the appropriate risk as defined by the board? If the underlying market changed, would the board be able to respond in time or would the CFO have to make the call about changing investments? Moreover, the CFO might have to devote more time to dealing with brokers who approach them about selling and buying investments.
“Suddenly the CFO, who is highly financially literate, has to become quite investment savvy,” Frinsdorf says.
In the case of this NFP, its auditor suggested that there was a better way of managing the investment portfolio. The upshot was that William Buck wrote an investment policy that clearly identified the board’s and its CFO’s responsibilities when facing both short- and long-term investment decisions. The portfolio was put out to tender and the firm advised on the strategic asset allocation and selection of the investment managers. When investment decisions are required, the investment manager rings William Buck which provides the asset consulting. A summarised report on the best assets to choose is sent to the CFO, who in turn reports to the board.
“Ensuring the sustainability of the organisation and delivering on the projects that are important to them are the motivating drivers for CFOs using services like ours,” Girdlestone says.