How to Choose a Nonprofit Financial Advisor

Introduction

Choosing a nonprofit financial advisor can be a difficult task. Nonprofit organizations can benefit from selecting an advisor who specializes in the unique financial considerations of nonprofits. Different service offerings, fee schedules, and investment approaches pose challenges in the decision-making process.  Furthermore, a lack of published reviews makes it difficult to determine whether a firm’s clients are satisfied.  With these obstacles in mind, how does an organization go about hiring a nonprofit financial advisor?  We recommend evaluating firms by reviewing the following elements of a relationship.

Conflicts of Interest

Relationships are built on trust.  It is important to identify and root out conflicts of interest when selecting an advisor.  A few potential conflicts of interest and their potential consequences are:

• Proprietary (“in house”) investment products:  Proprietary products generate additional revenue for the nonprofit financial advisor’s firm, and thus the advisor has an incentive to recommend them.
• Compensation from third-party investment products:  Advisors may receive compensation (e.g. a referral fee) from outside investment products.  This compensation may lead an advisor to use the products in client portfolios even if the products are not the best choice.
• Soft dollars:  In a soft dollar arrangement, an advisor may receive credits toward purchasing research in exchange for clearing trades through a particular broker.  The advisor may utilize a broker providing soft dollars even if the trade execution isn’t ideal for the nonprofit.

Fiduciary Status

There are two capacities in which a nonprofit financial advisor may serve an organization.  Before hiring an advisor, we recommend understanding in which capacity the advisor will be serving.

• Fiduciary:  The fiduciary standard requires a higher level of care.  The nonprofit financial advisor must take action that is not just appropriate but is in the client’s best interest.  In a fiduciary relationship, the advisor is typically responsible for ongoing monitoring and trading of the investment portfolio.
• Non-fiduciary:  The non-fiduciary standard requires a lower level of care than does the fiduciary standard.  Investment actions must be merely “appropriate.”  A non-fiduciary relationship often does not include daily oversight of the investment portfolio.

Service Models

While nonprofit financial advisors can be arranged in a variety of ways, one can classify the service models into two broad categories.  Each model has relative strengths and weaknesses. 

• Lead advisor:  The lead advisor service model revolves around a central point of contact at the nonprofit financial advisory firm.  The lead advisor typically represents the firm for meetings, calls, and emails.
• Team:  The team approach includes multiple points of contact, often organized by function.  The nonprofit will work with different team members at the firm depending on the topic.

The lead consultant format brings simplicity but also involves risk if the lead advisor is not very responsive or leaves the firm.  A team approach provides more depth and accessibility but may require more knowledge to reach the proper person.  We recommend looking for the right combination of depth/succession and accessibility/responsiveness to match your organization’s preferences. 

Additional Services

Nonprofit financial advisory firms can assist organizations with more than just managing investment portfolios.  Firms with an understanding of serving nonprofits are better equipped to grasp a nonprofit’s mission and values along with the purpose of the assets.  Such an advisor is likely to place greater importance on fulfilling its fiduciary responsibility.  Additionally, nonprofit financial advisors can assist with closing major gifts by interacting directly with donors and supplying donor interaction tools.  An advisor’s role in securing a major donation can effectively pay the advisor’s fees for a number of years.

Investment Philosophy

An investment philosophy represents an organization’s high-level investment beliefs.  The investment philosophy is driven by the nonprofit’s overall culture, not by a single board or staff member.  A nonprofit financial advisor should assist in developing an organization’s investment philosophy and incorporate it into investment policy documents.  Here are three key investment philosophy decision points:

• Aggressive or conservative:  Does your organization prefer to be more aggressive and accept the volatility that often comes with higher long-term returns?  Or instead, does your organization wish to reduce the swings in market value of portfolios?
• Active or passive:  Does your nonprofit aim to “beat the market” with an active approach?  Or conversely, do you believe that following investment indices with a passive approach is the better route?
• Biblically Responsible Investing (BRI):  Does the organization wish to have its investments follow its values?  Or does the organization believe that implementing BRI isn’t in the organization’s best interest?

Investment Policy

While investment philosophy is overarching, an investment policy is typically aligned with a specific portfolio.  Investment policies are technical in nature.  Accordingly, the nonprofit financial advisor should lead the drafting of investment policies with input from the nonprofit’s investment committee.  When selecting an investment advisor, organizations should determine whether they believe the firm can draft policies that are easy to interpret and follow.

Reporting

At a high level, reporting can be viewed as the means of knowing what is happening in an investment portfolio.  Additionally, reports facilitate fiduciary oversight.  We recommend that organizations seek out a nonprofit financial advisor that can provide easily understood, adequately customized reports in a timely manner.  When selecting a firm, nonprofits should inquire about the availability of reports for both accounting and investment committee purposes.  It is also valuable for organizations to be able to run reports through the advisory firm’s system on a self-service basis.

Fees

Controlling cost is crucial for nonprofits.  Unfortunately, analyzing and comparing fees across different advisors is surprisingly difficult.  Multiple types of fees (e.g. asset-based fees, flat fees, project fees) are frequent obstacles to understanding costs.  Furthermore, investment products and custody services represent additional layers of costs.  We suggest that before hiring a nonprofit financial advisory firm, the organization obtain a clear understanding of all fees.  Additionally, it is important for advisors to include fee information in the reporting.

Conclusion

Nonprofit financial advisors can provide a great deal of value to an organization.  With a thoughtful approach to choosing a nonprofit financial advisory firm and advisor, nonprofits can develop and maintain an excellent investment program.  Such a program will support the organization’s financial health, ensure strong stewardship, and provide confidence to donors.

If you want to learn more about Cornerstone and our nonprofit financial advisory services, please feel free to contact us today!

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