Imagine a wealthy individual; an art collector, for example, with substantial bankable assets. Provided that such an individual is not subject to marital or succession law restrictions, they may consider donating their assets to a foundation in Switzerland for philanthropic purposes. This gives them two main options for their investment in Switzerland: either they donate the assets into an already existing Swiss foundation with a charitable purpose, or they establish a new, tailor-made foundation. Irrespective of the chosen option, ensuring the efficiency of the foundation will be one of the foundation board’s key tasks.
This article outlines some of the challenging duties of the board of a Swiss charitable foundation, as well as the possibilities of digitalisation to enhance cost-efficiency and leave more funds for the foundation’s purpose.
Switzerland - Home to Numerous Charitable Foundations
Switzerland is a globally recognised jurisdiction for charitable foundations and the home country of numerous, world-renowned international foundations (e.g. UNO, Red Cross). By the end of 2018, Switzerland was the host country of roughly 13,000 charitable foundations and counting. 301 foundations were established during 2018 alone, corresponding to almost one new foundation per day, with total assets of all Swiss foundations amounting to roughly 100 billion Swiss Francs (CHF).
While the minimum initial capital should be no less than CHF 50’000, the kinds of assets which can be contributed to a foundation are numerous, and include cash, securities, properties, art, company shares and contractual rights to receivables, and even exotic assets.
The purpose of the foundation can be defined by the founder fairly freely within the limits of the legal framework. Foundations of purely charitable nature may apply for tax exemption with the competent tax authority in the canton where the foundation is (planning to be) based. As different rules may apply in each canton, the founder should choose the place of registered office carefully. The tax consequences can be easily planned ahead: upon request, the tax authority may even issue a tax-ruling prior to the establishment of the foundation, followed by a formal decision upon establishment, giving the foundation board the utmost comfort and planning security.
In addition to asking the tax authority for a pre-assessment, the founder should contact the supervisory authority prior to the establishment of their foundation, in order to discuss their plans and, in particular, the intended purpose of the foundation. All foundations in Switzerland are subject to supervision by the relevant governmental institutions.
This close supervision is one of the cornerstones of the Swiss foundation system. It is the foundation board’s responsibility to guarantee proper and efficient organisation, as well as the appropriate use and investment of the foundation’s assets at all times, in accordance with the purpose of the foundation. The supervisory authority must ensure that the foundation bodies do not make any dispositions that contradict the foundation’s charter and regulations, or which are in breach of law. Consequently, the foundation board is obligated to submit the foundation’s annual reports, as well as audited financial statements issued by an independent auditor, to the supervisory authority. Thus, every Swiss charitable foundation is subject to regular governmental supervision, and the financial situation, as well as the foundation’s activities (donations received, distributions made etc.), are subject to continual review.
Ensuring the appropriate use and investment of the foundation’s assets is one of the main challenges of the foundation board. International transactions, assets being held abroad and the regulatory environment (e.g. compliance with Common Reporting Standards (CRS)) can prove particularly challenging.
The supervisory authority pays special attention to the cost-efficient administration of foundations in order to ensure the financial benefit of its beneficiaries. While the board members of a charitable foundation often work on a voluntary basis, service providers and banks usually charge substantial fees for investment management and the preparation of the necessary accounting and financial statements. One responsibility of the supervisory authority is to review the annual costs of the foundation in relation to distributions made and verify that these figures remain in an appropriate ratio to one another. It is therefore crucial that the foundation board keeps costs of third party providers as low as possible, while still ensuring that the quality of services remains high. An infringement of the principle to distribute appropriate funds to the beneficiaries on a regular basis, may even lead to the loss of the foundation’s tax exemption status.
The foundation board must therefore be sure to always maintain control over the foundation’s assets and investment decisions. Consequently, board members need to have respective expertise in investment matters or, if this is not the case, assign the asset management to a professional financial advisor. In our initial example of the art collector, for instance, the foundation board would need to professionally administer the foundation’s assets, in this case, its artworks. Depending on the best interests of the foundation, it could lend the artworks to art galleries for an appropriate lending fee, sell the artworks and re-invest the sale proceeds in new artworks or fund philanthropic projects.
Foundations: Go Digital!
Digitalisation brings valuable opportunities for the foundation board; the magic words – digital accounting and investment reporting. Both can be key tools in maintaining the required control over the foundation’s assets and the development of its investments. An efficiently-used digitalised process may lead to efficiency enhancement and significant cost savings.
Digital accounting requires that data received from the bank, regarding the foundation’s investments, be in digital form. While this seems obvious, it may often represent an initial challenge, as banks submit their data in various different formats, qualities and methods of delivery. On the foundation’s side, digitalisation may therefore require the development of various electronic interfaces to automatically transform, import and process the bank’s digital data, into the accounting system’s format. As a consequence, one of the cost saving factors in digital accounting can be the choice of a suitable bank: An interface can be produced for any bank that can deliver a digital data feed, but the cost reduction potential varies depending on the quality of the data and the delivery method of the chosen bank.
While the necessary software is a cost factor, implementing the right infrastructure has numerous advantages in the long run:
As outlined above, one of the foundation board’s central tasks is to ensure the proper use of the foundation’s assets. Investment reporting gives the foundation board a transparent and clear overview of the foundation’s bankable and non-bankable assets, as well as its directly held assets: easily monitoring where they are and what they are worth. The factors that can be taken into account by the investment reporting software are numerous; they can range from the income of bankable assets to non-bankable assets, such as rental income or, following our initial example, art lending fees.
Asset performance must be measured on different aggregation levels (e.g. from asset class level over the different asset manager’s portfolios to the consolidated foundation’s performance) and evaluated against an appropriate benchmark. For a direct comparison of bankable portfolios, independent valuations and a consistent approach for performance calculation among all asset managers, is key. There is no use in comparing different return methods, as might be the case when comparing performance reports from different asset managers.
From a risk management perspective, investment portfolios should not be assessed individually, but on an integrated and consolidated basis instead. Depending on the foundation’s internal investment guidelines, the foundation board needs to regularly monitor effective asset allocation and compare it with the strategic allocation in the asset management agreement. If the foundation’s charter does not explicitly state that the foundation’s assets can be invested freely at the foundation board’s own discretion, the competent supervisory authority will verify whether the foundation board has chosen a prudent investor’s asset management strategy by applying the same statutory investment requirements as for the Swiss public retirement pension plan (so-called BVV2 Ordinance) for its assessment.
Investment reporting is a helpful tool for a foundation to save costs. Full transparency, i.e. full control over any kind of cash flow, such as fees and costs, is a crucial prerequisite in evaluating the performance of an asset manager. In order to avoid overcharging, all fees need to be compared with the fees levied on the competitive market. Further cost savings can be expected when different products - such as financial statements or investment reports - are produced on the basis of the same underlying digital data. Fees and other charges coming from the accounting can, in return, be considered in the investment reporting. Digital reporting has the capacity to communicate, in a comprehensive manner, the value and development of both bankable and other foundation assets – such as the value and income of an art collection.
However, even with the enhanced transparency of the described investment reporting, there are still certain cost factors that are difficult to optimise: it can be tricky to detect and measure hidden fees in funds or structured products. Depending on the fee schedule of funds, banks and financial intermediaries, precise fee control might be very time consuming and can therefore only be roughly reconciled.
The current trend of digitalisation brings great opportunities for Swiss charitable foundations and is being implemented by several Swiss fiduciary companies who offer accounting and investment reporting services. Many larger fiduciary companies have invested in a centralised, modern and technically well-equipped digital infrastructure, and are offering efficiency-enhancing tools to their clients. Board members of Swiss charitable foundations are advised to carefully evaluate the available service providers when outsourcing the accounting and investment reporting tasks of a foundation.
KENDRIS Ltd. is the leading independent Swiss provider of fiduciary, trust and family office services, national and international tax and legal advice, art management as well as accounting and outsourcing services for private and corporate clients.
Matthias Geissmann is a Senior Manager and Investment Reporting Specialist at KENDRIS, Switzerland. KENDRIS is the successor company to KPMG private, which was founded as a subsidiary of KPMG Switzerland in 1999, providing family office, trust and fiduciary services, Swiss and international tax and legal advice, accounting, outsourcing and art management.
Nicole Figi is a legal advisor at KENDRIS, Switzerland. KENDRIS is the successor company to KPMG private, which was founded as a subsidiary of KPMG Switzerland in 1999, providing family office, trust and fiduciary services, Swiss and international tax and legal advice, accounting, outsourcing and art management.