Scott Thomas, ChFC®, CAP®, CKA®, RICP®

Why Your Nonprofit Board Needs A Fiduciary Advisor

Let’s face it the regulations and rules are far more stringent today than just a few years ago.  Nonprofits are not immune to liabilities and neither are boards when acting carelessly.  In the past the “prudent man rule” might approve investment advisor simply based on the company they worked for and the size of their firm.

Why a true fiduciary advisor? A fiduciary must act in the best interest of the nonprofit and should have clear way to tell the board about limitations of choice and seek the best advice possible even if it means not doing business.  Full disclosure is not partial disclosure as mandated by Investment Act 1940.

Example is nonprofit has individual corporate bonds in their portfolio and having the advisor promise institutional trades and no mark ups or mark downs with full disclosure is one way to keep investment advisor honest and their firm. It would not be unreasonable to expect 1-2% improvement in overall performance with this type of due diligence.

Another example at the time of this article short term US Treasuries could net 2% for nonprofit on the cash portion provided there was at least $1 million of cash need and for smaller cash positions still should yield 1.5% on cash.  BankRate.com as of June 2018 still have many of the banks only paying .03% on cash.  So $1 million of cash not doing anything to seek out better cash rates only yields $300 a year at .03% and rate of 2% would yield $20,000. Sounds like a major gift to many organizations.

Here is example where the advisor has multiple mutual funds and investment strategist and charges an advisory fee and platform fee.  Under this arrangement it would be fair and reasonable to request that the advisor provide proof of any internal costs such as 12b-1 fees be netted back to the nonprofits account. True fiduciary would not be charging fees and then benefiting or their firm benefiting from hidden costs and fees. Best practices would seek to utilize institutional class shares and full disclosure on all fees.

The board should look for advice and services that are not hidden, rather spelled out and regularly (quarterly) disclosed and have the advisor and the firm sign off they are acting as fiduciary on the account and will be diligent and fully disclosed. If nonprofit has retirement plan (403b, 401K) there are options out there to now shift liability under 3(38) rules to custodian/firm signing off to take on risk normally born by executive director, CFO and board.

Beware of the relationship that tells you we will do this all of free because your such a great customer in another area like commercial loan on building or hold significant money with the organization. There is no such thing as a free lunch or free sporting ticketing or box at the ballet.

Perhaps you have heard the “Fiduciary Rule” was suppose to be here a couple of times in recent years only to be pushed back by the industry giants that do not wish to disclose the truth of hidden fees and transaction costs.  Good stewardship would ask vendors and alliance partners to be clear about the type of relationship you have and will your financial, banking and insurance partners act as fiduciary not as salesmen or fee advisors with hidden mark ups.  While slavery ended in this country in 1865 it does show up in many industries as when someone expects something for nothing.  The idea here is not about zero fees or costs rather real disclosure for what will be a shakeup when investment industry has to actually disclose costs, fees and other transactional costs not currently offered up to investing public.

Next step? Get an analysis by registered investment advisor who is willing to sign off as fully disclosed fiduciary model.  Review portfolio for hidden fees and missed opportunities and know that you are answering to the donors that have entrusted you and the staff to act in manner worthy of the organizations best.  If you do go the route of RFP or Request For Proposal be very clear on the expectations.  Be sure to request the advisors personal philosophy, planning and process to be spelled out.

Another common sense request for some nonprofits is a values screen.  For example Mothers Against Drunk Drivers Foundation would not want to invest and profit from alcohol industry. Screening out companies with 3% of gross revenues in alcohol industry might be the threshold or it maybe 0%. Doing this has proven to be effective way to show extra diligence on stewarding resources well and alignment with nonprofits values.  Even though there are some costs associated with screening and proactive advocacy the payoff of good will and excited employees and donors that see the board and leadership with greater respect.

Word of caution as board and leadership talk to investment and banking community about values screening most do not get the power of advocacy and investment values alignment until speak with experience advisor in the space.  Maybe the best next step is to hire out a review of current holdings in the portfolio compared to list of important values. Popular screens are tobacco, firearms, and pollution known stocks. There are over 8 trillion dollars of screened investments currently and the number is growing rapidly. What you own and profit from matters.

Lastly, two Foundations with similar investment portfolios both similar risk and both start with $2 million. Foundation “A” nets 5% after fees and costs for 20 years and grows to little over $5.3 million.  Foundation “B” nets after fees and costs 6% for same period and grows to little over $6.4 million. Both held same investments and risk but one was asked by board to be fully disclosed fiduciary and did not allow their firm to exercise influence to push higher internal costs programs. Twenty percent more assets can serve as proof that good stewardship matters.

As you explore these ideas of brining fiduciary responsible stewardship to your board or organization and have questions you can reach me at scott@stewardshipmatters.net

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