Editor's note: This is the first of three articles on financial management for nonprofit organizations.
Nonprofits are built around a common mission to serve their communities now and into the future. But to get there, they need a sound investment policy that governs how they manage and spend their assets.
"Nonprofits are built on passion, but unfortunately passion alone can't run an organization," said Lacie Richardson, an institutional wealth manager at BOK Financial®. "Nonprofits have a fiduciary responsibility to their donors as well as a need to protect their own assets. Having these governing documents helps nonprofits reach their goals."
Any nonprofit with funds to invest should have an investment policy, said Brooke Clark, who works with Richardson as a nonprofit advisor.
Essentially, an investment policy is a document that defines investment objectives, clarifies the roles and responsibilities of the parties involved, what investments can and cannot be included in the portfolio, and outlines a clear risk profile.
This governing document identifies the asset classes and investment vehicles the organization has determined are appropriate to meet the long-term goals of the organization.
"It should cover all of the investable assets of a nonprofit including short-term funds—like reserve funds or maintenance funds—and long-term pools of money, like endowments." said Ronnie Jobe, BOK Financial institutional investment advisor.
"When a nonprofit has clarity around how their money is working for them, it contributes to the short- and long-term vision of the organization,” said Clark. “Which, in turn, benefits the community being served, because it means the nonprofit will be around longer."- Brooke Clark, institutional wealth relationship manager at BOK Financial
"It also benefits donors because they know their favorite nonprofit has taken a proactive approach to ensuring they're on solid financial footing," said Clark.
Donors want to know their contributions are being managed properly, and it's not uncommon for them to request a copy of the organization's investment policy.
"Organizations have a fiduciary responsibility to donors to ensure assets are managed appropriately," said Jobe. "Having governing documents like an investment policy and a spending policy in place are a means to that end."
Elements of an investment policy
An investment policy should define the investment objectives, outline restricted investments and activities, and identify liquidity requirements. It should establish strategic asset allocation targets. A cohesive policy helps ensure revenue streams are being used strategically and to the benefit of the organization.
"If you don't have one, a board member could invest in what they personally prefer, so everyone would be going in different directions. This could lead to inconsistencies and missed opportunities," said Clark.
Jobe added that a well-written investment policy will provide guidelines for rebalancing should the portfolio get off course. "It also defines benchmarks for evaluating performance," he said.
A well-designed policy also aids in limiting the inherent risks in managing large pools of money and establishes a risk profile.
"Having an investment policy in place could also mitigate legal, financial or reputation risk such as mismanagement of endowment funds, which can create serious consequences," Jobe said.
Conflicts of interest—with staff members, members of the board or donors—can also be addressed to avoid future headaches.
Nonprofits that are taking steps to create or upgrade their investment policies should seek assistance from a professional investment manager with experience with these types of polices.
They should be prepared to discuss:
- Their current financial situation
- Short- and long-term goals
- Risk tolerance
- The creation of a spending policy
"An investment policy really can't be oversold. It's the foundation of everything else," Clark said. "It's a must-have for any organization that wants to continue to grow and carry on their mission, uninterrupted."
Part 2: Tracking dollars and donors
Part 3: Nonprofits meet new generation of charitable givers