Does your Nonprofit Need an Investment Policy Statement (IPS)?
As a best practice, nonprofits should have policies and procedures for investments and reserves, but many we talk to don’t know where to start. Have you recently heard any statements like these:
- “We should invest in cryptocurrency…there’s real opportunity for growth there!”
- “I’ve got a guy who can help us make a lot more money on our reserves, risk free!”
- “Should we invest in CD’s right now?”
Statements like these can send nonprofit leaders into a maze of challenging investment discussions and potential pitfalls. Though there is no legislation or regulation that requires nonprofit fiduciaries to have an investment policy statement (IPS)—and for good reason. Part strategic plan, part operating plan, the IPS incorporates your organizational mission into policies, procedures, and guidelines for managing your strategic reserves.
Similarly, the fact that an organization has an IPS does not guarantee that it is effective. A vague or outdated IPS is not likely to protect, much less grow, the reserves—especially in today’s complex and fast-moving investment environment. An IPS that is robust and comprehensive is a powerful tool for fiduciaries and for the institution whose mission is to increase their ability to serve.
Here are five key steps for developing effective and comprehensive investment policy for nonprofits:
Form an Investment Committee
Top priority should be to put together a small group of board members with some experience or interest in investment policy development. Depending on the relative experience of your volunteer board, you may want to consider retaining an experienced investment advisor to consult with the organization on IPS development and oversight of the investment reserves.
Start with Mission and Objectives
For nonprofits, mission and money go hand in hand. Creating an IPS begins with spelling out the purpose of the organization’s reserves. If the organization has multiple reserve pools with distinctly different objectives or time horizons, these should be identified and documented. In this stage, it’s helpful to think both short and long term and types of reserves that are needed in both categories
Match Risk with Spending Needs
While all investment involves risk, nonprofits must balance the desire to achieve long-term returns with the need to fund current operations on a day-to-day basis. The committee take should time to discuss the kind and degree of risk the organization is willing to assume in pursuit of its investment goals. Good questions around risk include:
- How comfortable are we with short-term losses?
- How diversified should we be?
- How much non-invested savings do we have and are those savings sufficient to weather a significant market decline of our investments?
- Do we fully understand the investments we’re proposing?
- Are we subject to any regulations like UPMIFA (for endowment funds) or any other donor-imposed restrictions?
These questions need to be asked in the process of formulating an approach to risk management. Rather than simply filling out a checklist we encourage honest and open dialogue among committee members about risk tolerance against intended time horizons, culminating with discussion with the full board at the time of approval of the IPS.
Asset allocation, benchmarking, and rebalancing
A well-designed IPS will provide guidelines for the allowable types of investments and allocations of those investments in the portfolio. It’s also important to set benchmarks to gauge the success of the portfolio over time. Establishing the frequency and method of reporting early in the process is also a key component of ensuring the best chance of success. Finally, periodic rebalancing of the portfolio is necessary to keep allocations from shifting too far from stated targets. It’s helpful to state in the IPS how frequently rebalancing will take place.
Revisit on a Regular Basis
Once a nonprofit has developed its IPS, it should be reviewed (or at a minimum, reaffirmed) every year. And because board members and other fiduciaries, who are legally responsible for the prudent management of the reserves, may not be experts in portfolio construction and management, many nonprofits choose to work with financial professionals who can guide the process of establishing and implementing investment policies.
If your nonprofit needs an IPS we are here to help! CLA’s Wealth Advisory practice provides an integrated team approach to help your nonprofit accomplish its goals.
Contributors to this article include Jeff Roberts and Peter Holupchinski.
Jeff loves helping nonprofits achieve financial excellence through improved monthly reporting, cashflow management, strategic planning, and systems design.
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