A Guide to Nonprofit Investment Policies

Nonprofit boards have a fiduciary responsibility to protect the organization’s assets and make financial decisions in its best interest. For organizations that invest reserves, endowments, or other funds, a written investment policy provides a starting point for deciding how those assets should be managed, how much risk is appropriate, and who is responsible for oversight. Investment policies are not only for nonprofits with large endowments; even organizations making relatively modest investments can benefit from clear direction. To help clients, prospects, and others, Klatzkin has summarized the key details below.

What Is an Investment Policy?

An investment policy is a written document that guides a nonprofit in how to manage its investments. It sets both short-term and long-term investment goals for the organization, and it establishes who is responsible for managing and overseeing those investments. In that sense, the policy is both an investment and a governance document. It creates an agreement among the board, management, and outside advisors about how investment decisions will be made and who is accountable for each part of the process.

It also creates continuity. Board members rotate, advisors change, and markets move. The policy should document the organization’s investment philosophy and priorities, so decisions do not depend on the preferences of the people involved at any particular point in time. For donors, this helps strengthen trust. For the board, the policy both reduces risk and directly supports its fiduciary responsibilities.

Core Components of a Strong Investment Policy

• Roles and responsibilities — The policy should identify who has authority to make investment decisions and what responsibilities remain with the board. It should also establish how often investment activity is reviewed, how often the policy itself is reviewed, and how changes to the policy are approved. An annual policy review is a common practice. If an investment manager is involved, the policy should clearly define the scope of that role. It’s important to note that the board may delegate investment management to an outside advisor, but to be clear, oversight always remains with the board.
• Investment goals — The organization should be clear about why it is investing. Some funds may be intended to preserve purchasing power or generate income, while others may be invested for long-term growth. The policy should connect those goals to the nonprofit’s mission.
• Risk tolerance — Investment goals need to be considered alongside the amount of risk the organization is willing to accept. The time horizon is a key part of that discussion. Money that could be needed in the near term generally requires a more conservative approach than assets intended to remain invested for decades.
• Portfolio guidelines — The policy will need to provide directions on how assets may be invested. That can include target allocations among equities, fixed income, cash, and other investment categories, along with acceptable ranges for each. Organizations should also identify investments or strategies they do not permit. Depending on the nonprofit, that could include margin purchases, speculative strategies, certain derivatives, or other investments the board determines are inconsistent with its risk tolerance.
• Spending policy — For endowments and other long-term funds, the policy should establish how much can be spent each year and how that amount will be determined. Many organizations use an annual distribution rate, often in the 3% to 5% range, based on the fund’s value over time. The appropriate rate depends on the fund and the organization’s long-term needs.
• Performance and reporting — The board will need a way to evaluate whether the investment strategy is performing as intended. The policy should establish appropriate benchmarks, reporting requirements, and the frequency of performance reviews.

Practical Considerations

Every nonprofit’s investment policy will look slightly different. It should focus on the needs of the organization, with a focus on accountability and proactive cash management.

A smaller nonprofit with limited reserves may focus on protecting principal and maintaining access to cash through FDIC-insured accounts, CDs, money market funds, or Treasury bills. Even at that level, a policy can clarify who may invest excess cash, which investments are permitted, and how much liquidity the organization needs to keep on hand.

A mid-sized or growing nonprofit may start to consider a greater mix of investments. Diversification, risk tolerance, time horizon, and the role of an outside advisor become even more important.

A large nonprofit may have several pools of funds with different purposes and time horizons. Its policy may include more detailed asset allocation ranges, spending provisions, performance benchmarks, and requirements for outside investment managers.

Contact Us

An effective investment policy helps the board carry out its responsibility to protect and manage the nonprofit’s financial assets. Whether an organization is looking to establish a policy or update an existing one, nonprofit leaders are encouraged to consult with an experienced advisor before making any investment decisions. If you have questions about the information outlined above or need assistance with a nonprofit tax or audit issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.