There
is a huge amount of pressure on charities to achieve the best
results with any funds they invest. In many cases making the
right investment decisions is not just down to a duty of care
to donors, but a straightforward question of survival; the
difference between continuing the work they do and throwing
in the towel.
This pressure, along with guidelines contained in the Trustee
Act 2000, makes getting the right financial advice a vital
part of managing a charity’s money. The Act says that
before investing a trustee must “obtain and consider
proper advice”. And reviewing investments requires the
same measure of care, unless, the Act says, the trustee considers
it is inappropriate or unnecessary.
So who should give this advice? According to the Trustee Act:
“Proper advice is the advice of a person who is reasonably
believed by the trustee to be qualified to give it by his
ability in and practical experience of financial and other
matters relating to the proposed investment.”
Of course, being qualified on paper does not necessarily mean
an advisor is in the best position to offer advice to a charity.
There are a huge number of financial advisors out there, and
only a very small number have the right knowledge and understanding
of the sector to be able to offer relevant, appropriate advice
to charitable organisations.
And even if an advisor has a wealth of experience, it is a
good idea to make sure the charity is in a position to get
the very best out of them. Ron Green, senior manager at the
Charities Aid Foundation financial services division, says:
“The first thing a charity should do is look at the
composition of the trustee board to see if you have the right
skill set. A board of trustees needs someone with investment
experience.”
Tom Sterry, trustee and treasurer of the CFDG, says: “Some
trustees are very experienced and probably could do without
external advice, but even experienced boards use external
advisors, for comfort as much as anything.” Particularly
in light of the Trustee Act, experienced boards are under
just as much pressure as inexperienced to demonstrate that
they have exercised due diligence.
Getting educated
But not every board is made up of ex-stockbrokers, and particularly
in the case of smaller charities, there may be no one who
feels particularly confident when it comes to placing funds.
If the board is short on experience, then it is a good idea
to find someone who can fill the gap. But clearly, this
is not always possible.
Where this is the case, the next best thing is to improve
the level of understanding of the existing board. “For
trustees who want to know more, there are a lot of seminars
and programmes that can give charities advice and help with
jargon,” says Green.
Some of the financial advice firms that work with charities
run seminars specifically aimed at improving trustees’
grasp of investment. The CFDG also runs between six and
eight courses a year with the same aim in mind.
CAF also produces a free guide for charities designed to
help them write investment policies, achieve their investment
aims and reduce risk.
Arming oneself with at least a rudimentary understanding
of investment, the jargon used and the products on the market
could help enormously in getting the right financial advice.
After all, even the best advisor is not infallible and it
pays to be able to ask the right questions.
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Choosing the best
The key to choosing the right financial advisor is quite
simply choosing someone who knows what they are doing. A
financial advisor who made a friend of yours very rich by
helping them to make excellent decisions may indeed be very
good at their job. But if this cannot be backed up with
a firm understanding of the sector, the ways in which charities
operate and the importance of a charity’s mission
to everything else it does, then the chances are the wonder-worker
could turn out to be a damp squib.
“If you went to an ordinary IFA it is pretty sure
they won’t know some of the keys of the kind of investments
for charities,” says Green. “They may never
have come across common investment funds, for example. It’s
important to go to somebody with experience and a good track
record in the sector.”
CAF has put together a panel of financial advisors with
the right background and the necessary skills to enable
them to deal well with charity clients. One of the firms
is Baker Tilly. Simon Hart, charity partner at the company’s
Birmingham offices, explains that charities’ very
different needs have led the company to set up a team dealing
only with the sector.
“We guide charities through investment decisions,
help them to interpret the performance of their portfolios
and help them to work out what sort of risks they want to
take,” says Hart.
Preparing to succeed
Before you go and see any advisor, preparation can help
in getting satisfactory results. Ideally, the trustees should
sit down and decide what it is they want to achieve as an
end result.
James Bevan, chief investment officer at CCLA says a charity
needs to think about three things before it seeks the help
of an advisor. Firstly, the time frame over which it wants
to invest. “Some investments are great for the long-term
but not the short-term,” he says.
Secondly, it should think about the risk it wants to take.
And thirdly, he says: “A charity needs to recognise
that there is no such thing as a free lunch.” In other
words, if an investment sounds too good to be true, it probably
is.
It is also important to make decisions from the outset about
whether or not there are ideological constraints on the
types of investments your charity should choose. “A
charity should have its own policy,” says Hart. “It
is important to be clear about any restrictions.”
The classic example is, of course, a cancer charity that
finds itself unwittingly invested in tobacco stocks, but
there are countless other ways in which an organisation
can place its hard-earned funds in areas that contradict
everything its mission stands for, and it is vital to think
about these before you start choosing investments.
The choice is yours
Even if you give them clear guidelines, an advisor will
not come up with a magic solution for your investment needs.
The final decision will always be down to the trustees.
“We have never said to a client you must go to this
investment manager,” says Baker Tilly’s Hart.
“We put in front of them a shortlist so they can make
an informed decision.”
If the choices you are given are not clear, if you do not
think they are right or you simply do not understand fully
what your options are, then do not be afraid to ask questions.
“A lot of charities do not feel confident challenging
a financial advisor,” says CAF’s Green. “But
what charities should do is thoroughly question their advisor
to the point where they are happy. If you don’t agree
or it is not clear then ask questions.”
There is far too much jargon and opaque language flying
about in the financial services industry, but a true expert
should be able to explain your options to you in a clear
and easy-to-understand manner.
“A poor explanation often means the person does not
really know what they are talking about,” warns Bevan.
“Trustees should keep asking questions and if they
do not understand something they should not go along with
it.”
Finally, do not feel you need to stay with the same advisor
forever. You and your advisor should review your investments
regularly to make sure you are getting what you need from
them. But you should apply the same tactics to your financial
advisor. It’s not all about investment performance
– if the markets are rocky then any advisor may struggle
to give the perfect results.
But reviewing a financial advisor every two to three years
should give the board a good idea of how well, or otherwise,
they are meeting your organisation’s requirements.
If things are not working out, a charity should not be afraid
of getting a second opinion or taking its business elsewhere.
The pressure to do the very best by both donors and beneficiaries
is intense, but by choosing the right advisor, and working
with them in the most effective way possible, you should
get the support you need in making the right financial decisions.
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