Here, Family Wealth Report asks Robert Chartener, chief executive at Foundation Source, about how the widely talked-about topic of outsourcing in wealth management has manifested in the private foundation sector.

When did the trend of outsourcing foundation administration first emerge?

Outsourced support services for private foundations first emerged about 15 years ago, and as these services have evolved and become ever more sophisticated - they’ve exploded in popularity. Since Foundation Source was founded in 2001, we’ve grown from a handful of clients to over 1,200 foundations under our management.

The availability of outsourced support has completely revolutionized the private foundation sector. Traditionally, a private foundation could be complex and expensive to administer, requiring the donor to coordinate multiple external advisors or even hire dedicated staff. Because outsourcing provides everything a foundation needs in one place—accounting, tax preparation and filing, compliance guidance, grants processing, and comprehensive administrative support—having a private foundation is infinitely simpler and more cost effective. In fact, outsourced services have so radically reduced the administrative burden and operating costs associated with a private foundation that it’s now practical to establish one with as little as $250,000.

What were the primary drivers?

Because private foundations are independent legal entities, they offer donors unmatched control and flexibility.  The flipside to these advantages is responsibility. Private foundations are subject to numerous regulations, and the tax code is both complex and evolving. Without an outsourced provider, staying on top of the paperwork and ensuring compliant operations could be challenging. Because many of today’s donors use outsourcing for some aspects of their businesses, it’s natural that this concept would carry over to their philanthropy. They understand that having a “virtual staff” of private foundation specialists and experts can alleviate the operational burdens, freeing them to devote their time and attention to their philanthropic aspirations.

What are the chief elements that go into an outsourced solution?

In our view, an outsourced solution should have the following components:

• Back-office administration: the daily operations of grant-making, expense processing, record-keeping, tax preparation and filing, and compliance monitoring of foundation activity.
• Compliance monitoring: verification of exempt status, USA Patriot Act due diligence, and reviewing foundation transactions for potential jeopardizing investments, taxable expenditures, excess business holdings, and self-dealing violations.
• Technology: online tools for conducting charity research, making grants, and viewing financial statements and other foundation records from anywhere in the world at any time.
• Advisory support: a staff of on-call experts to answer tax, compliance, and administrative questions whenever they arise. Some outsourcing providers even offer philanthropic experts who provide strategic advice and organizational support.

Which types of donors are gravitating towards outsourcing their foundation management?

Many of today’s donors approach their philanthropy with the same expectations that they bring to their business. They expect to see impact today – not at the end of their lives—and they want the technology, tools, and talent that support their aspirations. Too busy to do everything themselves, they want to unleash the full power of their foundations and attain measurable results – a goal that’s not achievable without sufficient support.  Given the impossible demands on their time, passing off the minutiae of the foundation’s operations makes sense.

What are key issues to consider when choosing an outsourced solution?

The foundation support marketplace is growing rapidly, and many companies are stretching beyond their core competencies to grab a piece of the action. These companies vary greatly in the size of their client bases, expertise in philanthropy, and investment in technology and human support. Some even offer complimentary private foundation administration to their high net worth clients as a strategy to gain assets under management.

However, as with many things in life, you often get what you pay for. In addition to maintaining a healthy level of skepticism, it’s important to exercise due diligence and ask:

1. Are you getting a single-source provider or a patchwork of services? Consolidating multiple functions in a single-source provider reduces the number of moving parts the founders need to keep track of and increases economies of scale.  It also ensures that the provider has a broad understanding of the foundation and its founders, rather than tunnel-vision limited to a specific function.
2. Is the support scalable? As foundations mature, they often grow in size, sophistication, and the number of players involved. Outsourcing and technology can be powerful tools to the growing foundation, especially if the foundation doesn’t have to go shopping for new providers and solutions at every stage of its growth. In short, you want an outsourcing solution that can grow with you.
3. Is the provider a private foundation specialist? Private foundations need not confine themselves to “plain-vanilla” grantmaking. A provider with in-depth knowledge of foundations can support every IRS-sanctioned capability of a private foundation; grants to individuals for disaster and hardship assistance; scholarships; international grants; PRI loans, loan guarantees, and equity investments; direct charitable activities, and even donations to for-profit companies in support of charitable endeavors.
4. What level of support are you buying, and is it appropriate? Some small foundations have very basic needs and require minimal support; other, larger foundations can be extremely complex. Instead of buying a one-size-fits-all package of services (and either paying for services you’ll never need or finding those services inadequate), you should be able to select the level of support that corresponds to your foundation’s requirements.

How does outsourcing the administration of charitable services boost overall business efficiency among family offices, RIAs, and wealth managers?

Family offices and RIAs are able to acquire and retain clients based on their ability to serve a wide range of family needs. Because they’re independent, they have the benefit of deciding whether to build the infrastructure to serve those needs in-house or partner with third-party entities to provide a best-of-breed solution for their clients.

Private foundation administration is one of those cases where outsourcing has distinct benefits for both advisor and client. The family office or RIA doesn’t have to learn the complexities of Section 501(c)(3) of the Internal Revenue Code, which is highly technical and often gray, in order to make sure the foundation stays within compliance. And it doesn’t have to create one-off systems to accommodate the unique requirements of making grants to nonprofit organizations or running charitable programs. Instead, the family office or RIA can focus on managing the investments within the foundation’s endowment while the client gets this highly specialized support.  Finally, partnering with an outsourced service that is exclusively focused on private foundations (and doesn’t offer investment advice) allows the advisor to benefit  from deep and specialized knowledge regarding what one can and cannot do within a foundation’s investment account, and how to efficiently deal with all manner of alternative assets.

How do private foundations that aren’t outsourcing typically manage these tasks?

Foundations that aren’t outsourcing their administration either hire staff (expensive), coordinate an external team of advisors (cumbersome), or do it themselves (frustrating, time-consuming, and possibly risky if they aren’t intimately familiar with IRS regulations and tax code).