How Third-Party Asset Management Works

Joe Smith recently met with his clients, Saul and María Donor. Joe has been managing their investments and providing financial advice to the Donors for years and has helped them adjust and grow their portfolio as their family’s circumstances changed, positioning them to put their kids through college, investing the proceeds from the sale of their family business and helping them manage the inheritance they received unexpectedly from María’s aunt and uncle.

Now in their late 60s, Saul and María were ready to discuss the next stage of their financial lives with Joe: looking at their lifetime income needs and estate planning goals.

During this discussion, Saul and María mentioned that they would like to start making charitable gifts. Joe asked about their goals and what organizations they wanted to support and they shared the following:

1. They wanted their gifts to support their alma maters out east, their church and organizations within the Greater Madison community that “were doing the most good,”
2. They wanted to give their adult children the ability to participate in their family giving now, and
3. They wanted to create a perpetual funding source for their charitable giving so their children can continue their family’s philanthropic legacy.

After some discussion, Joe suggested that Saul and María consider establishing a donor advised endowment fund at Madison Community Foundation (MCF). A donor advised fund would allow Saul and María to donate the money they wanted to designate for charitable giving now and decide which organizations they wanted to support later. As an endowed fund, the assets would be invested and a certain percentage would be available for distribution each year, which would allow the fund to grow over time to support their charitable giving well into the future.

By choosing MCF to hold their fund, Saul and María could make annual distributions to their schools and church and leverage the foundation’s local expertise to help them identify which organizations in the community were doing work that interested them. And Saul, María and their children could recommend to MCF which organizations to support. Additionally, Saul and María could name the fund as a beneficiary of their estate and have their children succeed them in advising the fund in the future.

While Saul and María liked the idea of working with the community foundation, they were anxious about how their gift would be invested. They knew Joe and had a long relationship with him; it was difficult for them to imagine making a significant charitable gift and trusting someone else to manage it. They wanted to make gifts during their lifetime but were only comfortable doing so if Joe remained involved.

Joe had recently read that MCF had launched a Third-Party Asset Management program. After Saul and María opened their fund and gifted their charitable assets to MCF, this program would allow him to continue managing the fund’s assets for MCF.

This sounded like a good solution to Saul and María, who reached out to MCF to learn more. They met with someone on MCF’s Donor Engagement team to discuss establishing a donor advised endowment fund through the Third-Party Asset Management program. After confirming that their proposed fund met the program requirements, Saul and María completed an Investment Adviser Recommendation Form naming Joe as the recommended investment adviser for their fund assets.

To be approved as part of the program, Joe needed to complete a Third-Party Asset Manager Program Application and provide MCF with some basic information about his firm and Saul and María’s investments. As part of the application process, he agreed that he would manage the fund assets in accordance with MCF’s Investment Policy Statement.

MCF staff then reviewed this information and recommended that their Investment Committee approve Joe as the third-party asset manager for the fund established by Saul and María.

MCF let Saul and María know that Joe had been approved as a third-party asset manager and sent them a fund agreement to sign. Once they returned it, MCF staff sent Joe an Investment Management Agreement and Investment Adviser Information & Attestation Form to complete.

Upon receiving Joe’s completed forms, MCF opened an account at his firm to accept the gifted assets. Joe then transferred the fund assets from Saul and María’s account to the new MCF account at Joe’s firm. Going forward, Joe will be required to provide MCF with periodic fund updates and annual confirmation that he and his firm are still in compliance with MCF’s Third-Party Asset Management Program requirements.

With the fund established and the assets transferred, Saul, María and their children are excited to see it grow and support nonprofits doing important work in the community for many years to come!