Nonprofits Should be Proactive When Hiring an Investment Advisor
Posted by Jill Johnson on May 21, 2025
Investment fraud has been one of the most costly type of scam reported to the FBI’s Internet Crime Complaint Center in recent years.Investment fraud are schemes where criminals misrepresent themselves or lie to victims to gain control of assets, which they then mishandle or steal. This type of fraud may pose a significant risk to nonprofits, especially those with endowments or operating reserves. Investment advisors may pose as legitimate experts and trick nonprofits into handing over their assets.
Outsider Risk
Investment fraud differs from occupational fraud (employee schemes) in that its perpetrators are usually outside professionals such as brokers, bankers, financial planners, investment advisors, or self-styled money experts. These individuals may be registered or licensed and have no previous criminal record. Increasingly, social media influencers are involved in investment fraud schemes, either as perpetrators or unwitting participants. The damage a dishonest staff member can do with occupational fraud is usually limited, but a corrupt investment advisor controlling a nonprofit’s endowment can cause significant harm.
Form 990 Rules
When investment fraud strikes, it can cause substantial financial losses and damage a nonprofit’s reputation with donors and the public. Tax-exempt organizations must disclose on their Form 990 if they’ve experienced a loss of more than $250,000 or 5% of their total budget or assets due to fraud. This information becomes public, likely to be reported by charity watchdog groups and the media.
Hiring a Trustworthy Advisor
Nonprofits should beware of unrealistic promises when considering investment advisors. Legitimate advisors should discuss the risk of losses and ask questions about the organization’s investment policy, including the types of investments to avoid. Nonprofits should look for advisors who are transparent and accessible, able to meet with the board to discuss the portfolio’s holdings and recent results.
Asking for Referrals
To find an honest and proficient investor, nonprofits should ask for referrals from other nonprofits, CPAs, attorneys, or other trusted advisors. Once a couple of names are gathered, they should be researched and reviewed by the board. Even after engaging an investment advisor, the board needs to closely monitor the professional’s decisions and the account.
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Jill is an expert working with health care and human service organizations including hospitals, nursing homes, diagnostic and treatment centers, mental health service providers, and medical practices. She also works with real estate and nonprofit organizations in the areas of auditing, Single Audit, HUD projects, information returns, and financial reporting. Jill is integral to our Health Care and Nonprofit services groups managing our larger hospital and human service organization clients. She is a past Regional Executive for the Healthcare Financial Management Association (HFMA) Region 2; she also is a past President of the Western New York Chapter.