Q: My congregation is expecting its first bequest. We would like to use it to establish an endowment fund. A stockbroker in the congregation offered to manage it for us, but we’re wondering if this is wise. We’re also worried that the endowment will have a bad effect on member giving to the church. What should we do? 

A: Give thanks that you have the opportunity to structure your endowment now, before it has any money in it! It is much easier to plan when you don’t have the worry of managing funds at the same time.

I would say, “Thanks, but no thanks” to the stockbroker. You want an arm’s-length, businesslike relationship with your fund manager. Also, a broker’s expertise can be expensive if he or she is earning commissions on investments. Many local congregations place their endowments in a joint denominational fund. Brokerage and mutual fund companies and the trust departments of banks also manage this type of fund.

It is true that sometimes, when a congregation has a large endowment, members ask, “Why should I give generously?” This kind of thinking can decrease annual giving and deprive members of their feeling of ownership and responsibility for the congregation and its mission. To avoid or correct this situation, some congregations adopt a policy limiting the amount of endowment income that can be used for internal purposes. For example, in one congregation the endowment matches giving by members, and any excess income is given to other organizations.

Properly managed, an endowment enables a congregation to endure hard times and to achieve goals beyond its current means. But when a single board is vested with the dual responsibilities of preserving the fund and using it to support the congregation’s mission, the temptation to overspend by “borrowing” from the endowment is strong. Two alternate structures that can work well are (1) a separate corporation whose trustees are elected by the congregation or its governing board, and (2) an endowment committee that is part of the congregation but has some independence from the governing board.

Sound policies are necessary for any endowment to be an effective means of fulfilling the congregation’s mission. The following policies should be in place:

1. Spending. This policy governs how much of the total investment return from the endowment is available each year. The most common spending policy calculates, on the same day each year, the average market value of the fund on that date for the last three to five years. A fixed percentage, typically 4.5 to 5.5, is then applied to the average.

2. Asset allocation. Even if the fund is managed by an outside agency, trustees still must decide how to allocate the fund among broad classes of investments, such as stocks, bonds, and money market securities. A typical allocation for endowed funds would be 70% stocks and 30% bonds, with the majority of the stock invested in established domestic firms and a small portion allocated to smaller and overseas firms.

3. Socially responsible investing. One advantage of a denominational investment fund is that its policies are likely to correspond to the values of the congregation. Private investment firms also offer socially responsible funds. Some endowments invest in special projects, such as assisting new congregations, backing low-cost housing, or microlending. Obviously, money invested this way would produce little cash income in the short run and might be lost entirely. However such enterprises, if they further the institutional mission, could be part of a full financial plan.

Rev. Dan Hotchkiss is an Alban Institute field consultant and Unitarian Universalist minister based in Boston who consults widely with congregations on financial and strategic planning, conflict management, and clergy transition. He currently is writing a book for clergy on financial leadership.