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Are you being Served?Trends in University Financial Services

IHEs need to see financial services as a way to add value.
University Business, Jul 2005

In 2003, American consumers spent $112.2 billion on higher education, reports the U.S. Department of Commerce Bureau of Economic Analysis. As large a number as this is, it is dwarfed by the $267 billion in endowment assets that the National Association of College and University Business Officers ( reports was held by U.S. and Canadian institutions. Even if you subtract Harvard University's (Mass.) colossal $22.1 billion, the number is staggering.

Most of Harvard's money is managed in-house, by the 175-person staff of Harvard Management Co. And that's unusual. Few institutions have the in-house resources to meet their investment objectives while generating the 17.5 percent increase in assets that Harvard reported in 2004. Even the university's closest peer, Yale (Conn.), generated a 15.5 percent increase on its relatively smaller $12.7 billion endowment, and it uses outside service providers to help it do so.

Whether university funds will be needed tomorrow morning or decades into the future, the prudent manager must optimize risk and return. And that's a big business for financial services providers.

"We do business with just under 100 colleges and universities," says Dean Pavlakis, senior vice president and commercial product manager at M&T Bank in Buffalo, New York. He notices a wide variety of practices among these customers rather than a sharing of best practices.

But what most educational institutions have in common, Pavlakis says, is that they don't see financial services as a way to add value.

It is to the university's
advantage to have a bank
with a strong local presence."
-Margaret Plympton, Lehigh University

They are missing an opportunity to learn best practices, improve investment performance, and even enhance the academic program. "We think there are tremendous opportunities for schools to work with banks," Pavlakis says, to collect cash more efficiently, deploy it in the short term, and disburse it more efficiently.

Good financial services can help colleges educate their boards, update investment policy, run the endowment, run the treasury, reduce fraud, and handle administrative functions. But they can't attract donors or hold fiduciary responsibility--those tasks remain squarely with the institution.

Margaret Plympton, vice president of Finance and Administration at Lehigh University (Pa.), relies on outside providers to supplement her staff's expertise. "Of course you want the annual visit from the provider, but you want a variety of folks telling you what their new services are," she says. "Because we have an asset allocation strategy at a sophisticated level, we hire a consultant to ensure our compliance with our allocation and to manage our currency mix." The fresh perspective has not only helped Lehigh manage its $796 million endowment, but it has helped the university fund its study-abroad programs better.

"Where a lot of universities get stuck is in being too liquid," says Jon Speare, managing director at Commonfund (, a nonprofit corporation based in Wilton, Conn., devoted to enhancing the financial resources of educational institutions. Too often, universities structure their total investments so that the permanent endowment has a very long-term investment horizon, and the treasury account invests only in money markets and overnight securities. But there may be opportunities for intermediate-term investments to fund intermediate-term needs, like facilities improvements, or even to invest funds received in August that will not have to be expended until May.

A next key practice, according to Speare, is to sweep all of the cash within the institution, structuring the treasury as an internal bank. If many departments are holding on to petty cash funds, the aggregate amount can be large enough to warrant more sophisticated handling. The problem? The investment policy sometimes hamstrings educational institutions from better management of short-term funds, notes M&T Bank's Pavlakis. "They don't think of this as a place to add value," he says.

At Lehigh, Plympton says that better currency hedging has allowed the university to maintain and expand its summer study-abroad offerings despite the dollar's weakening. That allows the school to lock in its costs early in the school year, so that there are no surprises in tuition or in course opportunities when it's time for students to depart. Had they persisted in thinking of cash investments in money-market terms, Lehigh's faculty and students would have suffered.

One of the most important services that outside providers can offer is contributing to the education of boards. "That's why we publish research," says John Griswold, executive director of Commonfund. "Some trustees might be aggressive investors in their own right, but then they get on the board and get very conservative."

Some of this education includes helping them draft investment policies and spending rules, where an outside perspective can help an institution update its practices. "We help a lot of our clients and prospects with investment policies. We take that part of the job very seriously," Griswold says.

He adds that many colleges need to improve their conflict of interest policies. One concern he has is that institutions are increasing the complexity of their investments while reducing oversight, especially as administrative offices get pared down. "If your board meets as volunteers a few times a year, you can't do the job, but you still have the responsibility," he says. The solution for many institutions is to hire consultants and multi-manager investment firms to do more back-office work, freeing the board to be primarily a fiduciary.

At the University of Indianapolis, using outside advisors has helped improve returns and allowed the college to expand locally and internationally. "You need to have professional managers," says Mike Braughton, vice president of Business and Finance for the university, and treasurer of the board of trustees. He cites an interest rate swap that one bank found for the school as an example of how it pays for his institution to work with experts. "We locked in 3.9 percent for 18 years," he says. In addition, the school has changed its investment policy to allow for a broader range of asset classes.

But the biggest change for the school's budget was a change in the spending rule from a three-year moving average to a two-year moving average. "If you have a bad year and a three-year moving average, you have a bad year for three years," when setting the budget, he says.

Although financial institutions have expertise to offer their university clients, there are things that universities can teach them. Because the internet was very much an academic phenomenon for decades before it was commercialized, most campuses have a more sophisticated understanding of the use of electronic communication systems than many businesses do. In addition, today's students are the quintessential early adopters of technology. They want to conduct business in as high-end a fashion as possible.

Purchasing cards are one example where IHEs can lead the way, says M&T Bank's Pavlakis. These charge cards allow employees to cover purchases and expenses. The institution then receives consolidating invoicing information.

Only one of Pavlakis's educational clients currently uses them, but he says they use it in a more forward-thinking manner than most corporate users. That's because the universities have a strong underlying systems infrastructure. "They link it to the general ledger and map it to the cost centers," Pavlakis explains. Departments do a single edit on a weekly basis, and the better understanding of where the funds are not only assists with budgeting, but also helps in making better short-term investments.

Glenn Fromer is director of development at Treasury Software based in Westin, Fla., which develops software for managing bank reconciliation and electronic payments. He says that educational institutions are in a bind because of the high volume of transactions coupled with their reduced headcount, especially at state-supported institutions.

But Fromer thinks this could work to their advantage, because the banks really want to promote their automated payment services. "Electronic services are where the money is for banks," he says. Used properly, they can also reduce costs and improve operating efficiency on the client side. Automated payments, Fromer says, can reduce fraud, abuse, and credit card merchant fees.

The downside of relying on financial institutions is the loss of local control, exacerbated by the tremendous volume of mergers among financial institutions. In some cases, this can conflict with the university's goals. Lehigh views economic development in eastern Pennsylvania as a key organizational mission, and the wave of mergers that transformed their bank from a local institution to a regional one and then to a national one hasn't helped.

Where a lot of universities get
stuck is in being too liquid."
-Jon Speare, Commonfund

"When it was just a local bank with local ties, there was a stronger sense of community engagement," says Plympton. "It is to the university's advantage to have a bank with a strong local presence."

But this loss of engagement has been offset by the dramatic increase in the services available, improving returns while relieving some of the operating pressure from a lean internal staff. "You're trying to further the mission of the institution, not necessarily change the world," says Commonfund's Griswold.

Ann C. Logue is a freelance investment services writer based in Chicago. She can be reached at

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