How to Manage Relationships with your legal, financial, and investment advisors

How can we get an honest picture from our advisors about whether the strategies they are pursuing are the right ones? How do we know our advisors are telling us everything we need to know?

Consider having general investment, legal and other training sessions for your foundation board that are conducted by someone other than the advisors who you’re working with. This will allow you to get yourself up to speed on new trends, so that you can objectively test what your own advisors are telling you. This includes learning what benchmarks exist in the investment world so that you can test what your investment advisors are doing.

The truth is that most advisors are honest. What’s really hard if you are an honest advisor, as most try to be, and your client doesn’t know enough and actually distrusts you for the wrong reasons and/or trusts you too much for other reasons. To avoid this, also consider asking your advisors to compare themselves to an objective benchmark, and check that benchmark with a third party source. In the future, you’ll know how to objectively figure out what they’re saying.

To what extent should our activities be monitored by the foundation’s legal counsel? How closely connected does our lawyer need to be in the day-to-day decisions of the foundation?

What we’re really talking about here are the issues of legal fees and what constitutes a good use of your lawyer. I don’t believe that the lawyer should be the equivalent of an extra board member who is expected to constantly monitor everything that a board is doing. I do recommend that you have them review and check on certain key decisions – whether it’s scheduling a checkup session or just getting ready to enter into a new engagement.

It also depends on the kind of grantmaking you’re doing, and the kind of investing you’re doing. If you think the board is generally up to speed on your programs, you can simply have your lawyer come in when you’re engaging in a new activity and tell you what the red flags might be. Upfront, and at least once a year, work with your legal advisor to figure out what these check-in times should be – it should only take an hour or two for them to say “these are the times when I should be called, these are the times when you’re fine, and this is a bit of a gray area.” I think that actually helps a lot so that you know when you might be heading into an area that needs a lawyer to look at it. Certainly, it shouldn’t be after the tax return has been filed!

Keep in mind that used properly, lawyers should be preventative in nature: you don’t want to wait until you have a problem. Unfortunately the way the legal industry has traditionally served clients, they’re usually brought in to react to problems instead of preventing them in the first place. You can change that dynamic.

Our family foundation has had a policy for two generations of not using family members as financial advisors. A young third generation member working in an investment firm really wants his firm to manage the foundation’s assets. We’re not sure we want to change our policy, but the pressure from some members of the board is intense.

The first thing to understand is that this is not an uncommon situation. Having a black and white policy that has lasted as long as it has with your foundation is a testament to your board’s awareness of this complex issue.

Clearly, this is a complicated situation, because it appears there is now a really talented person out there who might be the exception for whom you might need to change the rule. But it’s important to rely on a clear and articulated process, and it may make the most sense to keep the black and white policy you have developed. Such a policy is more consistent across generations and you will get the benefit of it over the long term.

For instance: perhaps this third generation person is a really good investment advisor and ends up doing a fabulous job. But what about when a fourth generation family member comes along and maybe isn’t as good? Then you now have the issue of “Well, you hired my uncle, so now you should hire me, because our family hires family.” It seems as though your prior board members had already thought this through and said no.

But what do you do when the star comes along? Well, I think you have to have a really honest conversation on the board about the benefits and the costs of hiring that person. The benefits might be that this is a great way to do it because this financial advisor is really good. But there’s awkwardness within the family that happens when one family member has that kind of relationship with the foundation and the others don’t, especially considering the fact that the policy will have changed for this person. If you decide, “Okay, we’re open to it,” then you absolutely have to compare them to other advisors and you must have them answer the exact same questions and be tested in the exact same way as other contenders for the position.

For additional information, NCFP Friends and Partner Subscribers are invited to listen to Managing Relationships with Your Legal, Financial, and Investment Advisors