Scientific calculator on top of a pile of cash

Investment Guidelines for Non-Profit Board Members

By Scott Severs, CFA, CFP®

As fiduciary board members of your non-profit, you have many responsibilities. One of them is appropriately managing your endowment funds so that the long term health of your organization can be ensured. This can be daunting for many participants, but fear not, it doesn’t need to be a herculean task. Here are three recommendations that will help point you in the right direction and free your time to focus on the larger picture issues that are so important to your non-profit work.

1. Hire An Outside Investment Manager

When you are ready to invest assets on behalf of your institution, it can be beneficial to hire someone to handle the day to day implementation of an investment program. If your plan is to do anything other than hold cash, you will want to engage a third party investment professional who can help you design a strategy that meets your particular needs and helps you manage risk. We would recommend interviewing at least three different wealth management firms. You will want to be comfortable with their investment approach, any conflicts of interest, and the fees that they charge, taking into account both the cost of advice and the cost of products used.

2. Develop an Investment Policy Statement

An investment policy statement (IPS) is the document that governs the risk level of the assets, identifies preferred investment styles, and establishes who is responsible for various management and oversight duties. It also outlines the reporting requirements for the investment advisor and is often used to define the spending policy for the organization.  The investment advisor you hire may help with the development of the IPS, but ideally, the board or the investment committee can start by giving this some thought in advance.

It is important for your board to discuss ahead of time the amount of risk that you are comfortable taking with the funds. This is dependent upon the time horizon for the assets, which is usually fairly lengthy, and is also related to the spending needs of the non-profit. This document is essentially a roadmap for the future of the funds, and once it has been established, it is critical that the board adhere to it through good and bad markets and hold the investment manager accountable. A review on at least an annual basis of the IPS is highly recommended to make sure it continues to reflect the goals and objectives of the organization. 

3. Establish a Sensible Spending Policy

There are a number of ways to construct a suitable spending policy for your organization. Choose one that makes sense for you and allows you to remain flexible in the face of unforeseen market events. Many organizations will opt for a flat 4% of the prior year’s ending balance to determine annual distributions. This can be ok given that many diversified investment strategies can comfortably produce returns in excess of 4% over a long period of time. However, a fixed 4% means that the dollar amount will change from year to year depending on short term market performance and can be a nuisance for budgeting. A smoothing approach may be more favorable and could involve using the average of the prior 3 years ending balances as the principal on which the distribution is calculated. Regardless of the method used, it pays to be somewhat conservative here, taking into account the current level of interest rates as you think about the return potential of your assets.

Remember that being a fiduciary is largely about understanding and managing risk. These three simple guidelines will help you in that endeavor and will give you confidence that your funds will continue to support you as you carry on the great work of your organization.