How Small Foundations Can Protect Themselves From a Madoff-Style Scandal

Is it too expensive for small foundations to undertake the due diligence necessary that would have protected them from falling prey to a Bernie Madoff-style Ponzi scheme? Jack Siegel, writing at Charity Governance, doesn’t think so.

In response to a query from a reader of his blog, Mr. Siegel provides a list of low-cost steps family foundations can take to avoid losing money with an unscrupulous investor.

First, people with relatively modest assets, in comparison to other wealthy donors, should reconsider the decision to set up a foundation. If the costs of maintaining a foundation are too high in comparison to assets, than perhaps it’s a better choice to create a fund with a community foundation or a donor-advised fund, writes Mr. Siegel.

Family-foundation leaders also need to understand how their money is invested. No matter how trendy an investor, if he or she can’t explain the investment strategy, it’s unwise to put your money with them, according to Mr. Siegel.

He reminds readers that hedge funds aren’t the only option, to consider using a custodian who is independent of an investment adviser, and to diversify one’s investments.

There are also investment advisers who specialize in serving small foundations, writes Mr. Siegel. The Commonfund and the Investment Fund for Foundations are two options.

What do you think of Mr. Siegel’s advice?