Fiduciary Guidance for Nonprofits: Separating Exceptional Financial Advisors from Slick Salesmen

Fiduciary Guidance for Nonprofits: Separating Exceptional Financial Advisors from Slick Salesmen Wednesday, September 18 th, 2013 Guest Hosts: Mark B. Weinberg Senior Partner Doug Black - Director 2013 All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Maryland 20850 301.231.6200 P 301.231.7630 F www.aronsonllc.com

Webinar Overview 1. Fiduciary Liability for Investment Decisions Mark B. Weinberg Senior Partner Weinberg, Jacobs & Tolani, LLP 2. Investment Management for Nonprofits: Identifying Best-in-Class Advisors Doug Black Director, SpringReef Partners LLC Page 3 Page 13 3. About the Presenters Page 28 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 2

Fiduciary Liability for Investment Decisions Mark B. Weinberg Senior Partner Weinberg, Jacobs & Tolani, LLP Please Note: This presentation is not legal advice upon which any reader may rely, but merely raises issues regarding which the reader should consult his or her attorney. 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 3

Discharging Your Duty as a Nonprofit Director Or Trustee Both Trustees and Directors are responsible if they do not perform up to the Standard of Care required of them by law. When it comes to investment, there are three (3) possible standards: 1. Prudent Person 2. Prudent Businessperson 3. Prudent Investor Please Note: This presentation is not legal advice upon which any reader may rely, but merely raises issues regarding which the reader should consult his or her attorney. 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 4

Know Your Duty Standard of Care by Investment Context, Title and State Operating Cash Flow Endowment D.C. MD VA D.C. MD VA Charitable Trustee Charity Director 3 1 3 1 2 1 1 1 2 1 2 1 1 = Prudent Person Standard 2 = Prudent Businessperson Standard 3 = Prudent Investor Standard 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 5

How Would They Hold You Accountable? 1. Investigation by the A.G. or the IRS 2. Lawsuit by a Cranky Donor or their Estate 3. Both would result in lost time responding, legal expense and reputational damage 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 11

How Can You Protect Yourself? 1. Get informed approval from the entire board or trustee of goals for investment. 2. Obtain as much objective data as is available to support whatever decisions you make about investment and the financial advisors you choose. 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 12

Investment Management for Nonprofits Identifying Best-in-Class Advisors Doug Black Founder and Director SpringReef Partners LLC SpringReef Partners LLC is a state-registered investment adviser in Maryland. The purpose of this material is limited to the dissemination of general information regarding the services offered by SpringReef Partners LLC. It is not intended to be a solicitation or offer to sell investment advisory services to residents of any state in which SpringReef Partners LLC is not currently authorized to do so. Form ADV Part II, which details the business practices, services and related fees of SpringReef Partners LLC, is available upon request. Investing involves risks and there is always the potential of losing money when you invest. Choosing a financial advisor recommended by SpringReef Partners LLC does not assure a profit or protect against loss. 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 13

Key Points of Discussion 1. The Investment Management Landscape: An overview of the three primary investment management models 2. The Red Flags: The issues we see most frequently across the industry 3. Separating Exceptional Advisors from Slick Salesmen How to identify best-in-class investment management professionals 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 14

Overview of Investment Management for Nonprofits There are three (3) primary investment management models that service nonprofit organizations: Broker-Dealers Private Banks and Trust Companies Registered Investment Advisors (RIAs) and Consultants Each model has its own set of advantages, limitations and potential issues. 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 15

Broker-Dealers Potential Advantages Breadth and depth of services and solutions Significant intellectual input Pockets of top-tier professionals Potential Limitations Suitability standard Overuse of proprietary products Advisor-driven client experience Scale and profit pressure on talent quality Bureaucratic and siloed 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 16

Private Banks and Trust Companies Potential Advantages End-to-end wealth management process Investment Policy Statement (IPS) capability Team of experts approach Consistent client experience Potential Limitations Proprietary product orientation Lagging performance Fees at higher end of the range 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 17

RIAs and Consultants Potential Advantages Fiduciary standard End-to-end wealth management process Investment Policy Statement (IPS) capability Regulated transparency Fee-based pricing Potential Limitations Inconsistent depth of solution set Multiple layers of cost Significant variance in financial strength 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 18

Spotting the Red Flags Of the 350,000 financial advisors and firms in the U.S., only a select few have the experience and expertise needed to effectively serve the needs of large nonprofit organizations. The remaining majority of advisors often have significant issues that may have costly consequences for organizations and their endowment or reserve funds. The primary red flags to look out for include: Conflicts of Interest Transparency Issues Deceptive Sales Practices 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 19

Distinguishing the Best from the Rest Given the sales-centered nature of the investment management industry, separating best-in-class investment management providers from slick salesmen can be difficult. SpringReef Partners has developed a comprehensive set of criteria designed to identify the exceptional financial advisors and firms most qualified to serve nonprofit organizations: 1. Firm and Advisor Attributes 2. Investment Process and Capabilities 3. Fees Relative to Industry Norms 4. Performance vs. Benchmarks and Peers 5. Client Service, Satisfaction and Retention 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 23

Firm and Advisor Attributes A. Regulatory history B. Conflicts of interest C. Transparency D. Focus on and experience with nonprofit organizations E. Firm stability, financial strength and risk management 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 24

Investment Process and Capabilities A. Comprehensiveness of investment process B. Investment Policy Statement (IPS) Development, implementation and ongoing review C. Breadth and depth of investment solutions across asset classes D. Strength of manager due diligence E. Client reporting capabilities 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 25

Fees, Performance and Client Service Fees Relative to Industry Norms A. Advisor / consultant B. Investments C. Administration, custody and execution Performance vs. Benchmarks and Peers A. Superior risk-adjusted performance results Client Service and Satisfaction A. Reputation, reliability and performance against client service commitments 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 26

Weinberg, Jacobs & Tolani, LLP provides diversified legal representation for a wide array of clients including nonprofit groups, advocacy organizations and charities, as well as for individuals, trusts, corporations, limited liability companies, partnerships and other professional organizations. The firm has over 75 years of collective experience in the creation, operation and compliance of tax exempt organizations, providing nonprofit clients with comprehensive tax advice, tax planning for donors, compensation programs for executives, and vigorous defense of Federal tax audits. Mark B. Weinberg, founder and managing partner of the Tax Exempt Organizations Group at Weinberg, Jacobs & Tolani, LLP, is an industry expert in legal and tax matters affecting tax exempt organizations. Mr. Weinberg provides expert counsel on matters that include tax planning, audits, governance and policies, frequently speaks and writes on issues relating to nonprofits, and is also a visiting lecturer at D.C. area universities. Contact: Tel: (301) 468-5501; Email: paladin@wjtlaw.com 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 29

SpringReef Partners LLC is a consultancy that provides independent, unbiased and conflict-free guidance to nonprofit organizations, associations, corporations and families on essential aspects of investment management, including: The quality and performance of their current investment management providers The search for and selection of new or additional investment management providers The review of investment performance and investment advisory fees Ongoing monitoring of advisor relationships for quality and performance Client-specific investment management consulting Doug Black, founder and Director of SpringReef Partners LLC, is a leading investment management industry expert and the creator of the most comprehensive advisor due diligence process in the business. Mr. Black has been featured in The New York Times, Barron s, Family Wealth Report, and Private Asset Management, and is frequently quoted in an array of leading national publications. Contact: Tel: (240) 364-5771; Email: dblack@springreef.com 2013 All Rights Reserved Aronson LLC www.aronsonllc.com 30