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October 25, 2020
Take Charge of Your Investments
By Michael C. Kozak, Esq., CFP

Michael Kozak
Michael Kozak
Most individuals serve as trustees or directors of nonprofits to have a positive impact on the individuals, families, or sector that the nonprofit serves, but many are not aware of the potential personal liability they face in this role.

Trustees and directors of nonprofits have a fiduciary responsibility to protect and invest organizational investments and many therefore engage an outside investment advisor. For them, the key question is how to find the right one given the multitude of choices and options. The answer is to use a high degree of care and diligence and by taking a few pages from the chief compliance officer’s playbook.
What Is a Fiduciary?
A real fiduciary will always put the nonprofit’s interest ahead of the advisor’s own business interests. Among those who can serve as a fiduciary are brokerage firms, banks, financial planners, insurance agents, investment advisors, custodians, and mutual fund companies. While these professionals often serve in an advisory role, many are not engaged in a true fiduciary relationship. For non-fiduciaries, their business comes first, not the financial well-being of the nonprofit.

This distinction between fiduciary and non-fiduciary is important because a fiduciary must always act in his or her clients’ best interests. Unfortunately, many advisors settle for relationships that hinge more on suitability. The former means a recommended investment must only be suitable, even if it is not in the best interest of the client. You deserve advice that is something much more than suitable. So do your donors and beneficiaries.

If your advisor can’t tell you in writing that he or she is acting as your fiduciary—always acting in your best interest—you owe it to your organization to find another advisor. It’s that simple.
If You Don’t Use a Recognized Custodian...
Many advisors who don’t use a separate custodian are not running a Ponzi scheme, but using a separate custodian does provide you with important additional protection. A custodian is the firm that holds your assets, but which may or may not decide how to invest them. For example, Charles Schwab, Fidelity, and TD Ameritrade are examples of large custodians who may hold assets yet allow an outside advisor to direct them.

Of course, many large banks also custody money and invest it. The key to deciding on a custodian is the level of transparency the custodian provides. If you can’t verify that the money is actually there, then it is time to rethink your custodian.
Checking Out Your Advisor
Nonprofits must act and think like a regulator by requesting documents of their advisor and investigating with a cautious eye on a regular basis. At a bare minimum you should consult both the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) websites to check the disciplinary record of the firm and the individual charged with handling your investments.

It is important that you do not rely on the SEC or anyone else to fulfill your fiduciary obligation. Take charge yourself by asking for the following:
  1. Form ADV Part I AND II (Including Schedule F): These documents spell out an advisor’s range of fees, potential conflicts of interests, and other important information to understand them better. You can find Form ADV Part I and some information on registered individuals at For now, you will need to request Part II and Schedule F from each advisor. I recommend doing it annually.
  2. Code of Ethics: This document spells out the internal policies that insure your best interests come first.
  3. A Privacy Statement. I would recommend requesting a privacy statement to verify what steps are taken to protect your privacy and sensitive information.
  4. A list of Code of Ethics Violations for the last five years.
  5. A list of all professional personnel who have left in the last five years and where they are currently employed. (A good fiduciary interviews these individuals, not just those still with the firm).
  6. The most recent SEC deficiency letter and how they have addressed it.
  7. A copy of the investment processes used to manage the portfolios.
  8. The fundamental analysis of the advisor’s most profitable idea of the last year and the least profitable idea of the last year. Most good firms use a formal write up. This is a window into the process which is very important to understanding how they think.
  9. A list of references including both current and former clients. It is important to note most people never give a bad reference. That beings said, professional references are often more important. What do the lawyers, accountants, or other professionals who work with the firm or their clients have to say?
  10. A list of all fines, lawsuits, and other violations the advisor or advisory firm has ever faced. This is important because under current regulations firms are allowed to drop certain violations that occurred over 10 years ago from their disclosure documents.
Putting it all Together
Working with a professional financial advisor should be a long-term relationship. He or she should be prepared to work with you as required to help you understand how your organization’s investments are faring and what is likely to impact their performance.

Your advisor should help you assess whether your “big picture” is still on track and how your investments have performed based on asset allocation and specific asset selection. A periodic, comprehensive statement audit will make sure you are on the right track.

Your advisor should know you and act on your behalf and you should be able to trust him or her. That being said, heed the expression “Trust but verify.” Key is finding an advisor who not only is willing to sit on the same side of the proverbial table with you during the first meeting, but for every meeting after that.

Michael C. Kozak is director of wealth management and chief compliance officer for Cabot Money Management. He can be reached at 978-745-9233 or via email at
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