Nonprofits, like any business, utilize well-rounded investment strategies to maximize their financial standing. A majority of capital received by nonprofits are through donations or grants. In order to utilize funds as efficiently as possible many nonprofit organizations will opt to make investments into stocks, bonds, or other assets.
Boards have a fiduciary duty to stakeholders to protect the assets of the nonprofit organization, as well as to act in accordance with the organization’s mission and long-term goals. An investment policy statement, or IPS, can help ensure the internal decision makers of a nonprofit organization and its stakeholders are on the same page. Furthermore, creating and distributing an IPS can offer the board protection from allegations regarding a breach of fiduciary duty.
What is an Investment Policy Statement?
An investment policy statement is a document drafted between an investment portfolio manager and a client that outlines the general principles and rules of the investment manager. In simpler terms, an investment policy statement defines how a manager can invest their clients’ money.
Nonprofit organization’s investment policy statement follows the same outline as any other. In the case of a nonprofit, the board or directors or perhaps an investment committee would take on this oversight. The organization has the capability of hiring a committee and financial advisor and delegate the management of the organization’s funds, but the responsibility and decision making ultimately comes down to the board.
Most relationships that involve an entity investing money donated or on the behalf of another entity develop an investment policy statement. Maintaining on the same page with clients or donors can help mitigate any negative allegations in the future.
Importance of Establishing an IPS
Boards have fiduciary duties to utilize organization funds donated by stakeholders for its intended and stated use. Failure to adhere to the organization’s mission and intention can lead to a deterioration of the trust between board members and stakeholders. Because nonprofit organizations rely so heavily on donations and grants for long term success, it is crucial to communicate and maintain a positive relationship with stakeholders.
Developing and distributing an IPS can key stakeholders in on how their money is being utilized and the mission and purpose behind various investment vehicles or strategies. Any board member or stakeholder understands that risk is involved in each investment. An IPS can help in outlining the level of risk the organization is willing to take on as well as the long-term goals and outlook for various investments.
Due to various levels of risk and the inability to predict the future, developing an IPS can allow nonprofit organizations to clearly define how and when investments are reviewed and measured. Not only will this improve the long-term growth of investments, but it will allow greater peace-of-mind in the hearts of donors when pondering whether their donation is being utilized properly.
Defining Long-Term Goals
When creating an investment policy statement, the governing board of the nonprofit organization should consider three main things: will the IPS protect the value of the initial invested assets, will the IPS reasonably ensure that the investments will grow in value, and can the organization access its assets in the case of cash flow issues.
Investing in any asset involves risk, so it is important for nonprofits to diversify their investment portfolios to help mitigate large losses. An IPS can help identify the diversification of the portfolio for all parties involved to understand. Defining long term goals in the IPS can also help the organization’s board make the right decisions for investing. Nonprofits often are created around a certain mission or goal. An IPS can help align the organizations overall goals with its investing strategy.
Establishing an IPS for a nonprofit organization stipulates the investing goal of the organization that can be referenced for years into the future. Without clear and defined goals, employee or board member turnover can lead to a misunderstanding of how the organization should be utilizing its assets. An established IPS will eliminate the collision of differing missions and reinforce goals that can be shared universally throughout the organization in both the short term and the long term.
Components of an IPS
Due to the nature of an investment policy statement for nonprofit organizations it is important to include key components to cover as much as possible. Nonprofit organizations should look to make their IPS as specific and detailed as possible because the IPS will serve as the standing policy for how the board is to invest organizations funds in good faith. Fragasso Financial Advisors based in Pittsburgh, PA recently posted a blog about the important elements of an investment policy.
An investment policy will also serve as a written record as to how the organization will invest its assets that can be continuously referred to in various situations.
Statement of Purpose
The statement of purpose will outline the organization’s objectives, policies, and guidelines related to investment practices.
Mission/Values
The organization’s values should be the driving force behind its investment policy and should be a focal point of an IPS.
Assignment of Responsibility
Managing an organization’s assets begins with clearly defining who holds responsibility and oversight over investment assets and the tasks necessary to implement the IPS.
Roles should be defined for the board of directors, relevant committees, and outside financial advisors if applicable. Any outside committee or organization that is involved with investment practices should have a defined relationship in the IPS.
Spending Policy
A crucial factor of the IPS, the spending policy outlines how annual cash flow and operating capital should be utilized. This should also address procedures involved in managing the liquidity of an organization’s assets.
Performance Measurement Standards
This section of the IPS should outline the standards and practices to be used when measuring the performance of a fund.
Investment Objectives
This section should include primary and secondary objectives such as real portfolio growth, meeting annual spending needs, or capital appreciation.
Fulfillment of Fiduciary Duty
The IPS is an encompassing governing document that nonprofit organizations and their board of directors can reference when defending certain investment decisions or strategies. Because of the fiduciary duty held by board members to adhere to a uniform and agreed upon set of standards, an IPS can alleviate questions regarding goals and purpose.
These are just a few of the sections that should be included in an investment policy statement for a nonprofit organization. An IPS is the driving force behind all decisions made regarding asset investment, so it is crucial to formulate a well-rounded and highly detailed IPS to help guide the nonprofit organization in the long term.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.
