Advisers who seek to give back to their community — while also attracting new clients — often consider serving on the boards of charities or nonprofits.
However, just because the cause may be a worthy one doesn’t mean that there aren’t conflicts of interest or other pitfalls along the way. Advisers need to plan their work in this area just as carefully as they plan their clients' finances.
“Sometimes people think, ‘Hey, it’s for a charity; I’m not making money off this,’” says Dan Bernstein, chief compliance counsel at MarketCounsel, a compliance consulting firm. “But it still rises to the level of having conflicts and supervision.”
PROTECT YOURSELF
It’s an area that is especially ripe area for fraud, Bernstein explains, and it’s important for advisers to take steps to protect themselves.
The SEC released a letter outlining where the most common deficiencies occur.
Larry Ginsburg, a planner in Oakland, California, cites a horror story about a colleague on the board of a charity whose head embezzled funds. Even though the adviser had recommended that all major transactions require two signatories, the board didn’t accept his recommendation — the signature of the embezzler was the only one needed. Despite the adviser’s explicit warnings, the board blamed him — and filed a complaint against him.
Now Ginsburg counsels advisers to protect themselves first. That means being alert to the possibility of worst-case scenarios and taking precautions to avoid them.
The first, and most important, step that advisers should take is to consult their compliance officers to define and clarify guidelines for the relationship with a nonprofit before entering into it.
For one, advisers should to consult their compliance officers before joining a board, to help define and clarify the guidelines.
The biggest dangers relate to situations in which their roles as directors or trustees of a charitable organization might create the potential for advisers to direct assets to themselves or their firm.
“Don’t get into charitable work, don’t get into positions on the board specifically to try to direct money to your own business,” says Martin Schamis, head of wealth planning at Janney Montgomery Scott. “That’s the sort of thing that gets you into trouble.”
Paul Auslander, the director of financial planning at ProVise Management Group in Clearwater, Florida, agrees. “You can’t get on the board and try to pitch their 401(k),” he says. “You have to remove yourself. You can review it as part of the finance committee, but you’ve got to bid it out and have other entities do it.”
Auslander adds some compliance officers are against advisers acting as treasurers or in any money-handling role requiring finance-related decisions.
AN OBVIOUS CONFLICT
Never serve on a board at the same time as you are managing money or giving investment advice to that board. It may sound obvious, but sometimes distinctions can be blurred, especially if the organization is small or informally run.
For example, other board members may start asking an adviser board member occasional questions about investments or cash flow management, says Chris Stanley, general counsel for Loring Ward Holdings, a firm in San Jose, California, that consults with and advises other RIA’s.
“First it’s once a quarter, then it becomes once a month, then once a week,” he says. “Then it evolves into the adviser, rather than just being a normal board member, effectively providing financial or investment advice on an ongoing basis.”
This might create difficult situations. “It could raise questions about what are the rights and obligations of each party,” he adds. “What happens if the investments go south? Does the adviser get blamed?”
If an adviser’s charitable activities are in any way related or intertwined with a client’s charitable activities, Stanley says, the line between personal and business activities can “get very blurry.”
Even if a client is the one who brings up the idea of donating to a charity that he’s involved with, Ginsburg tells them that they need to know that he cannot in any way encourage them.
THE ‘POOR SCHMUCK’
Some conflicts may be widespread but not so obvious. Auslander points to the not uncommon situation in which advisers serve on homeowners’ associations.
“There’s the poor schmuck who’s out there helping his community by trying to make sure that people haven’t messed up their lawns,” Auslander says. “If he didn’t list it on his outside business activity form, and the broker-dealer picks up on it through other means — and, believe me, they’re pretty creative in finding things out — that guy’s going to have a problem.”
Being on a co-op board is even more dangerous, Auslander adds, because “a co-op board has real power.”
Most advisers say that such problems can be avoided with careful planning and disclosure and that the extra effort is worth it for the personal satisfaction that comes with the work.
Get involved for the right reason – to give back to your community and not just to fish for prospects.
It’s important for advisers to remember that they can provide an important service to nonprofits, Schamis says. They can help when looking to select investment partners or advisers, or looking for assistance in developing investment policy statements, as long as they recuse themselves if there’s a potential conflict.
Advisers can also play helpful roles in monitoring expenses and investments and providing oversight, Schamis says, “making sure that the nonprofit you’re a part of has selected a really good investment adviser to work with.”
He adds, “Your expertise is very valuable as an adviser to these boards, but typically it’s as a representative of the board, not as the board’s financial adviser.”
SERVE, DON'T SELL
The most important thing, advisers say, is to get involved for the right reasons — to give back to your community and not just to fish for prospects.
“Frankly, everybody knows that most people get on boards to meet people and network,” says Auslander says. The key, experts say, is that you don’t go into charity work consciously scouting for business. Be content in knowing that if people meet you in the context of the nonprofit and they’re impressed with your work and your commitment, they’ll likely remember you.
“That’s a skill you develop over the years,” says Auslander, who is vice chairman of the Clearwater Marine Aquarium. “Eventually, you move up the ladder, and you become someone they think they need to know.”
There’s definitely a benefit in terms of publicity, visibility and opportunity for advisers who serve on nonprofit boards, but they should consider it as “an unintended benefit,” says Ginsburg, who recently completed a third term on the board of directors of the Alameda County Community Food Bank.
“If you don’t have charitable intent, don’t do it,” he says. “It’s that simple.”
