Introduction

Welcome to “The Road to Nonprofit Investing,” a comprehensive resource designed to navigate the intricacies of managing and optimizing your nonprofit's financial assets. In a world where fiscal responsibility is paramount, this guide serves as a resource for your staff members, board members, and investment committees seeking to understand the principles of nonprofit investing and uphold their fiduciary duties so they can maximize their financial resources to support your organization’s mission.

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Created from our expanding Road to Nonprofit Investing series and based on decades of experience working with nonprofit organizations, this article explores the crucial aspects of nonprofit investing, from the role of governance in preventing conflicts of interest and establishing an efficient Investment Committee to crafting a purposeful Investment Policy Statement (IPS) and understanding your organization's investment spending policy. It provides detailed insights into selecting the right investment advisor, understanding asset pools and allocation, and aligning investments with your mission, all while emphasizing the importance of maintaining trust, credibility, and strategic alignment in your nonprofit's financial endeavors. Explore the investment best practices, strategies, and insights to empower your nonprofit organization's investment efforts. Ensure your organization's mission flourishes through prudent and ethical financial stewardship.

This guide to nonprofit investing will answer questions including:

• What are our nonprofit investing fiduciary responsibilities?
• How do we create a nonprofit investment policy?
• How do we open a nonprofit brokerage account?
• What resources do we need in place before starting a nonprofit endowment?
• What are the best practices when it comes to endowment management?
• What are good endowment investment strategies?
• How do I evaluate advisors who provide investment consulting for nonprofits?
• What services do nonprofit investment advisors provide?
• Is a local financial advisor adequate to manage our investment program?

Table of Contents

• Your Board’s Fiduciary Duties
• Effective Decision-Making with an Investment Committee
• Critical Policy Documents
• Other Important Policies

• Aligning Asset Pools with Your Objectives
• Aligning Investment Policies with Each Fund’s Objectives

• Key Investment Principles for Nonprofits
• Exploring ESG Investments for Your Nonprofit 

• The Value of an Investment Advisor
• Advisor Communication is Essential to Success
• Choosing the Right Investment Advisor for Your Nonprofit

• What is the primary goal of nonprofit investing?
• What are the legal implications of investment decisions for nonprofit organizations?
• What are the fiduciary responsibilities of nonprofit board members in investing?
• What is the role of an investment oversight group, like an investment committee, in a nonprofit?
• What is an endowment in a nonprofit organization?
• How important is asset allocation for nonprofits?
• What role does a nonprofit's investment policy statement (IPS) play?
• What are the risks involved in nonprofit investing?
• Why should a nonprofit work with a fiduciary advisor?
• What factors should a nonprofit consider when selecting an investment advisor?

I. The Pillars of Governance Excellence in Nonprofit Investing

Your Board’s Fiduciary Duties

A nonprofit board member serves an essential role in the oversight and responsibility of the organization. In this role, you have a fiduciary obligation to ensure you manage your organization’s investment programs prudent and cost-effectively. This responsibility includes safeguarding the organization against conflicts of interest, establishing a solid investment oversight group, implementing and maintaining appropriate documents and nonprofit investment policies, and conducting thorough due diligence to guarantee that financial resources are utilized effectively and ethically.

Effective Decision-Making with an Investment Committee

While your board has a fiduciary responsibility for your nonprofit’s assets, investment oversight authority is often delegated to a finance or investment committee. An Investment Committee aids a board in fulfilling its fiduciary duties by ensuring efficient, transparent asset management and decision-making aligned with the organization's best interests and ethical standards. A Committee Charter is a crucial element of a successful oversight group and outlines the committee's authority, roles, and responsibilities.

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Your Investment Committee will generally be a team of 3-7 qualified members with varied backgrounds responsible for drafting policies and procedures, managing the relationship with the investment advisor, reviewing investment performance, monitoring investment program compliance, and reporting results to the board. Quarterly committee meetings, ideally before board meetings, are an effective way to ensure effective decision-making. The committee members overseeing an organization's investment program should diligently conduct an annual review of critical fiduciary oversight components. This includes ensuring adherence to a responsible spending policy, compliance with the Investment Policy Statement, evaluating the reasonableness of investment fees, and maintaining well-organized and accessible investment records.

Learn More:

For more insights on structuring and optimizing your Investment Committee, check out our guide, “Investment Committee Best Practices.” It’s your go-to resource for maximizing your committee’s impact.

Critical Nonprofit Investment Policy Documents

For several reasons, substantial investment-related policy documents are vital for your nonprofit organization. Firstly, they provide consistency and continuity in the face of staff and board member turnover. When individuals leave or join your organization, these documents ensure that the organization's investment strategy remains stable and coherent. Secondly, they are crucial for documenting decision-making processes. Documentation is essential for internal record-keeping and for demonstrating due diligence and strategic thinking to external stakeholders. This level of documentation builds trust among stakeholders, including donors, who often seek reassurance that their contributions are being managed responsibly and effectively. Furthermore, transparent investment policies promote openness about how funds are allocated and managed, which is essential for maintaining public trust. Lastly, these policies ensure that strategic decisions are not ad hoc but aligned with your organization's long-term goals and mission. 

The Investment Policy Statement 

A well-written Investment Policy Statement (IPS) is the cornerstone of any successful investment program. Serving as a clear roadmap, it guides your organization toward its goals while ensuring adherence to fiduciary responsibilities. Amid fluctuating market conditions, variable asset returns, diverse expectations, and ongoing risk uncertainties, this IPS is crucial for steering your organization's long-term investment journey.

Your IPS should address these essential items:

Clear definition of duties and responsibilities: Identify the different parties and their responsibilities in overseeing the assets. Typically, organizations will outline the roles of the board of directors, investment committee, investment manager, and custodian.

‍Investment strategy and allocation: Outline strategic asset allocation focusing on diversification, specific asset class guidelines with allocation ranges and targets, and the rebalancing policy to maintain strategic target allocations. A well-crafted IPS is flexible enough to respond to changing market environments and ensures changes can be made without a lengthy approval process. 

‍Management and performance evaluation: Establish criteria for selecting nonprofit investment advisors and strategies as wells as a framework for periodic performance reviews and benchmarking.

‍Define your spending policy: Lay out how you'll determine sustainable spending rates, the methodology behind these calculations, and the implementation of your spending policy. 

Interested in Learning More?

To dive deeper into crafting a standout IPS, download “Elements of an Effective Investment Policy Statement.” You'll find a wealth of information to help you refine your investment strategy. Happy planning!

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Other Important Policies

Conflict of Interest Policy: A well-written Conflict of Interest Policy provides security to your organization. It helps manage personal conflicts of interest among organization leaders, protecting your organization from a loss in reputation, donor gifts, and potential legal action. Your policy should clearly define what constitutes a conflict of interest and outline procedures for disclosure and resolution. Board members must be transparent about potential conflicts and avoid voting on matters where they have a financial interest.

‍Spending Policy: A Spending Policy helps ensure that members of your organization’s oversight group are on the same page when taking distributions from your endowment or other funds. It governs the discretion over distributions, sets the account's spending rate, and defines qualified expenditures. The policy should include clear financial goals for the account, a formula for calculating and capping the spending rate, and specifics on who has authority over taking distributions and their timing. Additionally, it should delineate eligible expenses.

II. Types of Nonprofit Investment Accounts

Aligning Asset Pools With Your Objectives

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Are you looking to align your organization's assets with its needs and goals? The first step is to create a structure for your assets that mirrors your organization's unique requirements. Nonprofit organizations often manage various types of pools of assets to support their operations, initiatives, and long-term sustainability. These asset pools can vary widely in nature and purpose, and each must have a dedicated investment policy and strategy. Such policies and strategies should be tailored to reflect the specific time horizon, objectives, spending needs, and capacity for the volatility of each asset pool. This careful planning ensures that the assets are managed effectively to support your organization's goals while maintaining financial stability. Each type of asset pool may have its own set of financial management policies, accounting rules, and legal requirements, making their individualized management and oversight critical for the nonprofit's success and compliance with legal and donor requirements.

Here’s an overview of some common types of nonprofit accounts:

Operating Reserves 

Liquid funds that are readily available to cover emergency spending requirements

These funds are a savings account or a pool of funds set aside to cover the costs of unexpected expenses or to sustain your organization during periods of reduced revenue. Think of this account as your financial safety net or ‘rainy day fund,’ ideally holding at least 3 to 6 months’ worth of operating expenses. Operating reserves help ensure your financial stability.

Board-Designated Fund 

A fund that provides income that meets target spending and long-term objectives

Once your Operating Reserves are in place, consider this account for meeting target spending and long-term goals. Funds here are generally unrestricted, and the board decides on their usage, such as future projects, a new initiative, or long-term goals, guided by specific spending policies.

Donor-Restricted Fund

Fund with donor-imposed restrictions that provide income to meet target spending

These are funds that have been restricted by donors for specific uses. Your organization must use these funds exclusively for the intended programs or projects as the donor dictates.

Endowment

A steady, long-term source of funding that comes from using only the generated income or appreciation

A nonprofit endowment is a pool of funds intended to be invested to generate ongoing income for your nonprofit organization. It is generally expected to be a perpetual account, providing consistent financial support over the long term. An endowment is typically set up with the stipulation that the principal amount remains indefinitely intact. Only the investment income or the appreciation of the principal is utilized for the organization's activities, ensuring that the fund continues to support your organization's mission perpetually.

Building or Capital Fund 

A fund that meets specific needs by an expected date

These funds are allocated specifically for long-term capital investments, typically including purchasing, constructing, or renovating buildings and facilities. Additionally, they can be utilized for the acquisition of major equipment. Naturally sourced from capital campaigns, these funds represent temporary accounts that are earmarked for particular expenditures related to capital projects.

Eager for More Insight?

For a comprehensive look at setting up these investment accounts, download “A Nonprofit's Guide to Structuring Investment Accounts.” It's a valuable resource for aligning your financial strategy with your nonprofit's objectives.

Aligning Investment Policies with Each Fund’s Objectives

Once your organization has established the appropriate funds, such as endowments, operating reserves, or designated funds, developing distinct investment policies and strategies for each becomes crucial. Creating nonprofit investment policies is vital because each fund type has unique characteristics and purposes, which demand tailored approaches to investment. An investment policy statement, as explained previously, serves as a guiding document that outlines the goals, risk tolerance, time horizon, and spending needs specific to each fund. For instance, an endowment fund that provides long-term financial stability would likely have a different investment strategy than a short-term operating reserve, which needs to be more liquid and less volatile.

The investment strategy, derived from the policy, is the practical application of these guidelines. It involves selecting the right mix of assets (like stocks, bonds, real estate, and others) that align with the fund’s objectives and constraints. A well-crafted strategy considers the fund's time horizon – whether the assets are needed soon or can be invested over decades – and the organization's overall financial goals and capacity for risk. For instance, a building fund for a future capital project might prioritize growth and capital appreciation, while an operating reserve might focus on preserving capital and liquidity. These tailored policies and strategies help maximize the returns relative to the risk taken and ensure that the funds are available and aligned with the organization's objectives and needs.

III. Developing an Investment Strategy for Your Nonprofit

Nonprofit organizations face unique challenges in developing endowment investment strategies and balancing financial sustainability with mission alignment. While there's no one-size-fits-all formula for your investment strategy, applying fundamental investment principles is critical to developing a practical approach.

Key Investment Principles for Nonprofits

1. Clarity and Understanding: The Foundation of a Successful Investment Strategy
   
   A crucial aspect of investment oversight is transparency. As dedicated investment advisors serving nonprofits and endowments, we frequently encounter organizations needing help to grasp their current investment portfolios, often due to complex and poorly structured allocations. This complexity can lead to ineffective diversification and breach of fiduciary responsibility, which may conflict with Investment Policy Statement (IPS) guidelines. Ensuring that your portfolio is well-constructed and clearly understood by the committee is vital to combat this. Frequent reporting and regular portfolio review sessions for committee members can also be instrumental in maintaining clarity and understanding. A well-informed committee can make more effective decisions and provide better oversight, ensuring alignment with the nonprofit's goals.

2. The Power of Asset Allocation
   Asset allocation, the blend of stocks, bonds, cash, and potentially alternative assets, is the most critical factor in your investment outcomes. It's essential to strike a balance between potential risks and rewards. Modern Portfolio Theory (MPT), backed by robust academic research, suggests that a well-constructed portfolio can maximize returns for an acceptable level of risk. However, this is not just about scientific calculations; it also involves careful judgment and experience to align with your organization's goals and risk tolerance. 
   
   Consider a nonprofit dedicated to providing emergency relief that may require quick access to funds. Their asset allocation should prioritize liquidity and stability, such as a higher proportion of cash or short-term, low-risk bonds. Contrast this with a foundation focusing on long-term endowment growth, which might adopt a balanced mix of stocks and bonds. The stocks provide growth potential to outpace inflation and grow the fund, while the bonds offer stability to ensure funds for annual spending needs are available. 
   
   For a clearer picture, check out a Sample Asset Allocation Model showcasing how time horizon, volatility, and performance influence the ideal asset mix. Download “3 Key Components of an Optimal Asset Allocation Policy” for a deeper understanding of tailoring an asset allocation to your nonprofit's needs.

3. Keep Costs in Check
   In the unpredictable investing world, controlling investment expenses is a crucial aspect you can influence. These costs directly impact your long-term results. Minimizing investment fees maximizes the funds available for your mission. It's critical to scrutinize all investment-related expenses, ensuring they are in line with your organization’s interests:  
   • Custodian Charges - Assess the fees for asset custody and trading. Aim for these to be minimal or non-existent, as these charges have decreased dramatically over the last ten years.
   • Investment Advisor Fees - Understand how your advisor charges for their services, including investment advice, asset management, client service, and reporting. Ensure the fee structure incentivizes the advisor to prioritize your organization's financial goals. 
   • Investment Manager Expenses - Scrutinize the fees associated with your investment strategies. Compare these costs to industry peers to ensure you pay the appropriate amount. Lower costs can lead to substantial savings over time, which is especially important for long-term investments.
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4. Effective Performance Measurement
   Per the principles of clarity, asset allocation, and cost control, routinely monitoring your investments' progress is essential. This oversight is key to ensuring that these key aspects are effectively managed and to fulfilling your fiduciary responsibilities:
   
   • Performance Review: Periodically assess if the investments meet expectations and compare their performance against relevant benchmarks.
   • Goal Alignment: Ensure the portfolio’s returns align with your nonprofit's financial objectives and adhere to the risk parameters set by your asset allocation strategy.
   • Benchmarking and IPS Compliance: Regularly compare your portfolio’s performance with appropriate benchmarks and check compliance with the Investment Policy Statement (IPS), adjusting as needed.

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Exploring ESG Investments for Your Nonprofit

If you've been watching investment trends, you've probably encountered the term ESG. But what does it mean for your nonprofit? Environmental, social, and governance (ESG) criteria are standards that socially conscious investors use to screen and evaluate potential investments.

• ‍Environmental - How a company performs as a steward of the environment.‍
• Social - How a company manages its relationships with key stakeholders, including employees, customers, suppliers, and the communities they serve.‍
• Governance - Oversight of the company, including leadership, board structure, compensation, audits, internal controls, transparency, and shareholder rights.

If your organization is keen to support ESG principles, here are some tips to consider:

Limited Options

Be aware that applying ESG screens might narrow your investment choices.

Organizational Needs vs. Personal Preferences: Always prioritize the organization's interests when managing its assets.

Balance ESG with Other Portfolio Considerations

It's a challenge to meet everyone's specific ESG concerns. Aim to balance positive ESG features, cost-effectiveness, and overall portfolio needs.

Maintain Diversification

Remember, well-managed companies often consider all stakeholders and adopt robust ESG policies.

Look Beyond ESG Scores

Companies with lower ESG scores might be actively improving. It's worth considering these as potential investment opportunities to encourage positive changes.

Want to Learn More?

Consider adding ESG investments to your nonprofit's portfolio. Check out “A Nonprofit's Guide to ESG Investing” for insights on whether ESG fits your organization.

IV. The Role of a Financial Consultant or Advisor for Nonprofits

Prudently managing a nonprofit’s assets is vital to your board’s role. Unless you have deep in-house investment expertise, partnering with an advisor providing investment consulting for nonprofits is prudent when opening a nonprofit brokerage account.

This advisor should be more than just an expert; they should be a trusted partner who aligns your organization's assets with your investment goals. Look for a fiduciary advisor, meaning they must put your organization’s interests ahead of their own. The advisor should love working with nonprofits and bring a well-rounded approach. Beyond just handling investments, they should offer services tailored to help your nonprofit thrive and succeed.

The Value of Nonprofit Investment Advisors

Nonprofit financial advisors bring valuable expertise and guidance to nonprofits, helping them navigate investment challenges and ensure effective financial asset management. Here are key areas where an advisor can bring significant value to your organization:

1. Alignment of Stakeholders: Investment advisors are essential in facilitating consensus-building and ensuring everyone works towards a common objective, enhancing decision-making efficiency.
2. Optimal Asset Allocation Decisions: They guide nonprofits in making effective asset allocation decisions for long-term returns.
3. Crafting Essential Documents: Advisors assist in creating key documents like the Investment Policy Statement for structured decision-making.
4. Independent and Objective Investment Management: They offer unbiased advice to mitigate emotional biases in investment decisions.
5. Optimizing Balance Sheet and Fund Management: They bring expertise in optimizing balance sheets and managing funds for increased asset growth.
6. Understanding Investment Results: They clarify financial data and reports, aiding informed investment decision-making.
7. Disciplined Rebalancing: Advisors implement rebalancing strategies to maintain desired asset allocation and reduce risk.
8. Facilitating Transitions: They ensure smooth transitions in investment committees and board memberships for continuity.
9. Cost-Effectiveness: Investment advisors reduce overall investment expenses by strategically selecting low-cost asset managers.
10. Building Confidence in the Investment Program: Their presence boosts confidence in the oversight group and donors, ensuring commitment to financial objectives.

Advisor Communication is Essential to Success

As a stakeholder in a nonprofit organization, effective communication with your investment advisor is critical to achieving your goals. You should receive frequent and transparent communication to ensure that everyone involved in your nonprofit's governance – including your staff, investment oversight committee, and the board – is fully informed and engaged in the investment process. This inclusive approach ensures informed decision-making, fosters collective responsibility, and upholds transparency and trust.

Expect at least quarterly updates from your advisor and more often during significant market or organizational changes. These updates should inform you about portfolio performance, investment strategy, market trends, and how they align with your nonprofit's goals.

Your reports should be clear, concise, and without complex jargon, allowing stakeholders of varying financial expertise to understand them. Communication shouldn't be restricted to one-on-one interactions; it should encompass all stakeholders, including staff, committees, and the board.

To evaluate if your investment advisor is communicating effectively, consider these five questions:

1. Performance Reporting: Are the performance reports straightforward, and do they include relevant benchmark comparisons?
2. Accessibility: Are communication and reporting available online in an organized, easily accessible manner?
3. Archiving: Are past reports and communications archived systematically for reference?
4. Policy Review: Does the advisor regularly communicate about policy reviews and updates?
5. Custom Reviews: Can custom portfolio and performance reviews be shared using video to provide a more engaging and detailed analysis?

These questions will help you assess the quality and effectiveness of your investment advisor's communication, ensuring it aligns with the needs of your nonprofit organization.

Choosing the Right Investment Advisor for Your Nonprofit

Typical Financial Advisor vs. Nonprofit Investment Advisor:

While most financial advisors focus on individual wealth and retirement needs, nonprofit advisors are attuned to nonprofits' distinct long-term goals and compliance requirements. Unlike typical advisors, who may need more expertise in specialized areas crucial for nonprofit governance, nonprofit specialist advisors are adept at managing the unique needs of entities like endowments and foundations. They tailor their processes to align with your organization's objectives, enhancing decision-making and overall success. Importantly, the typical advisors' service model often leads to communication gaps and misaligned goals within nonprofits. Your organization will be best served by an advisor who engages a wide range of stakeholders - staff, committees, boards, and donors - ensuring that everyone is well-informed and confident in the stewardship of your assets. 

Learn More Efficiently:

For a concise comparison, download “Get the Most From Your Nonprofit Investment Advisor.” It’s a handy guide to help you find the best advisor for your nonprofit's unique needs.

Learn more:

Learn more about how a nonprofit investment advisor adds value to your organization by downloading “The Value of a Nonprofit Investment Advisor.”

How to Select Your Investment Advisor 

Selecting an investment advisor is a pivotal decision for your board and investment oversight committee when it comes to investment and endowment management. Given the significant implications for your organization's financial future, this choice demands a careful and well-structured approach. There are several pathways to consider in this selection process, each with its unique advantages and considerations.

An Investment Management Request for Proposal (RFP) is a common method. An RFP is a formal document that invites investment consultants and advisors to submit proposals outlining their services, qualifications, and fees. This approach allows your organization to compare various options in a structured format. However, it's essential to recognize the intricacies and time commitments associated with the RFP process. Crafting a detailed RFP, reviewing submissions, and conducting follow-ups can be extensive and complex.

Alternatively, some organizations prefer direct engagement with a select few advisory firms. This approach involves shortlisting two or three highly qualified firms and conducting in-depth interviews. This method can be more efficient than the RFP process. It allows for a more dynamic and interactive discussion, helping you assess each firm's compatibility with your organization more directly. Such face-to-face or virtual meetings facilitate a deeper understanding of each firm's approach, values, and how they might align with your organization's goals.

For a series of papers and resources to help your organization determine if an RFP is suitable for you and how to go about the process, see these links:

Should You Issue an RFP to Select Your Next Investment Advisor
5 Pitfalls to Avoid When Issuing an Investment Advisor RFP
The Alternative to an RFP: A Simplified Approach to Selecting Your Investment Advisor
How to Create an Investment Management RFP for Nonprofit Organizations with RFP Template
How to Evaluate an Investment Advisor's RFP

V. FAQs about Nonprofit Investing

What is the primary goal of nonprofit investing?

The primary goal is to maintain or grow the nonprofit's financial resources while aligning investments with its mission and values.

What are the legal implications of investment decisions for nonprofit organizations?

Nonprofits must comply with laws and regulations regarding investments, such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in the U.S., which requires prudent management of charitable funds, proper documentation, and adherence to donor restrictions.

What are the fiduciary responsibilities of nonprofit board members in investing?

A board member’s fiduciary obligations require them to act in the nonprofit's best interest, ensuring investments are prudent, aligned with the organization's mission, and compliant with legal and ethical standards.

What is the role of an investment oversight group, like an investment committee, in a nonprofit?

The board often delegates an investment committee to oversee the organization’s investment strategy, including drafting policies and procedures, managing the relationship with the investment advisor, monitoring performance, and reporting quarterly results to the board.

What is an endowment in a nonprofit organization?

An endowment is a fund with a goal of keeping the principal amount kept intact while the investment earnings are used for the nonprofit's operations or specific purposes.

How important is asset allocation for nonprofits?

Asset allocation is crucial as it determines the balance of risk and returns in the investment portfolio, impacting the nonprofit's financial stability and ability to fund its activities.

What role does a nonprofit's investment policy statement (IPS) play?

The Investment Policy Statement guides investment decisions, outlining objectives, risk tolerance, asset allocation, and criteria for selecting investments and investment managers.

What are the risks involved in nonprofit investing?

Risks include market volatility, liquidity issues, investment mismatches with the organization’s values, and potential conflicts of interest, requiring careful management and oversight.

Why should a nonprofit work with a fiduciary advisor?

A fiduciary advisor is legally obligated to act in the nonprofit's best interest, providing unbiased advice and reducing the risk of conflicts of interest, which is essential for ethical and effective financial management.

What factors should a nonprofit consider when selecting a nonprofit investment consultant?

When selecting a nonprofit financial advisor, you should consider the advisor's experience with nonprofit clients, their understanding of fiduciary responsibilities, fee structure, investment philosophy, and how well they align with the nonprofit's mission and values.

Conclusion

Effective investment management, governance, and communication are key for your nonprofit looking to grow, inspire donors, and fulfill your long-term mission. We encourage you to explore eCIO's extensive nonprofit investment resources to understand better investment and governance best practices in the nonprofit sector. These resources are designed to guide and support your organization's journey toward financial sustainability and alignment with its mission.

Introduction to Our Nonprofit Investment Advisor Team

Furthermore, to assist you in understanding your nonprofit’s investment options, we would like to offer a mutual introduction with a member of our dedicated nonprofit investment advisor team. Our advisors are well-versed in addressing nonprofit organizations' specific needs and challenges. They are available to answer any questions you may have and provide personalized assistance to help your organization navigate its unique financial landscape. This introduction allows your organization to benefit from expert advice and tailored support in your investment and governance endeavors.

Click here to schedule a time to talk!