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Disclosed Investment Expenses

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Why "Disclosed" Qualifier

Foundation Advocate and our related company, FoundationMark, very consciously uses the qualifying term “disclosed” whenever referring to investment expenses for a very simple reason, foundations are supposed to break out their overall expenses and allocate which were attributable to investing and which were for charitable purposes, but we don’t think they are as vigilant in documenting their investment expenses as they should be. 

Why Foundations Should Make the Effort to Account for Their Investment Expenses

Foundations are exempt from most, but not all, taxes. Foundations in fact have to pay 1% of their net income in excise tax (more if they don’t distribute the required 5% of assets).  The formula used to calculate the tax owed calls for foundations to deduct their investment expenses, much like deducting mortgage interest for personal taxes. Foundations that don’t account for all investment expenses are leaving money on the table. 

Why are Some Foundations Missing Out on Their Tax Deduction?

One reason is that getting a full and accurate accounting for investment expense can be a pain in the neck.  Consider a foundation investing in mutual founds, of course the mutual funds charge investment fees and these fees are tax deductible for foundations, but it might be expedient to simply look at the net asset value along with capital gains and losses and not hunt around for the fund’s expenses.  Unsurprisingly, financial firms don’t highlight how much they charge you in an easy to see way. But foundations should insist on transparency from their providers so they can take full advantage of their tax deduction.

Why Do Some Foundations Report Very Low Investment Expenses?

While mutual funds are highly regulated and their fees are required to be published, this is not the case with many other asset managers, like hedge funds and private equity, so getting an accurate bill from them is a lot harder to figure out.  We believe that many foundations simply skip it or expenses are buried in a different line on the tax form. Take the $13 billion Ford Foundation as an example, which recorded just $10 million in “other professional fees” in 2017. The profession fee line is where management fees typically appear,  While $10 million might seem like a lot, it is less than 0.01% of assets, this seems a little hard to believe as they had about $10 billion invested in alternative investments which typically charge high fees. We would guess that Ford is accounting for their investment expenses in another line (probably net capital gains) and so is getting the full extent of the tax benefit, which would explain why their disclosed investment fees are so low.

Filed Under: Trustee Resources, Expenses

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