As fiduciaries on a nonprofit board, you have a number of responsibilities. Among those is making sure that the long-term financial health of your organization is secure. For those organizations who are fortunate enough to have an investment portfolio, the stakes may seem even higher. Boards and investment committees must provide oversight and management of these funds, but for many, this is uncharted territory. Here are some simple steps that you can take to ensure that the portfolio will serve you well for many years to come.
Define Your Core Values for the Investments
Go around the table in your investment committee meeting and determine your list of “must haves”. Do you believe that the funds should be managed in an active manner or using an indexed approach? Do you want to incorporate socially responsible or ESG (Environmental, Social, and Governance) concepts into the portfolio? How does the group feel about risk? Some topics, like ESG, should also be explored at the board level as they relate to the values of the organization. These are all concepts that should be discussed and agreed to up front. They can then find their way into the investment policies and can be used to generate specific questions that an investment advisor can help you explore further.
Develop a Strong Investment Policy Statement (IPS)
This is a critical step for boards and committees who have made the decision to invest funds for the future. Most organizations have some kind of operating account where dollars are intended to support short term needs (less than 1 year). For those that have excess funds, an IPS is a must. This document governs the risk level of the assets, identifies preferred investment styles, and establishes who is responsible for various management and oversight duties. There are many templates available that can be used, or you can craft one yourself, tapping into the insights of your board and committee members. The IPS is your opportunity to codify your intentions for the funds. It will become a living document that can be used to help an investment advisor manage your funds while also reminding future board members of your desired goals from the outset.
Implement Key Strategies to Help You Sleep at Night
The reality of nonprofit investment management is that you will likely hand over the running of the portfolio to an investment advisor, and you will not be monitoring things on a day-to-day basis. This means that in the interim between reporting opportunities, you must feel confident that the portfolio is being managed appropriately.
Consider these best practices for investment committees when it comes to overseeing your portfolio and advisor:
- Establish asset allocation targets and acceptable ranges for major asset categories that you invest in and monitor these when you meet. Remember, the asset allocation of your funds will be the most important determinant of your experience over time, much more than market timing or individual security selection.
- Schedule 2-3 in-person or video conference meetings with your investment advisor per year. Get these on the schedule ahead of time so attendees can plan around them.
- Get into a rhythm of covering specific topics each time you meet so all members know what to expect and you can get the most out of your limited time together.
- Define a custom benchmark that can be used for performance comparison. This should be a combination of indexes based on the asset classes used and blended at the appropriate risk level for the account.
- Be clear about the protocols for making changes to the risk or specific holdings within the portfolio, and make sure the advisor understands these. The advisor will have discretion to manage the portfolio, but there should be no big surprises from one meeting to the next.
- Utilize the resources of the advisor for board and committee education about topics such as spending policies, socially responsible investing, market and economic conditions, and other appropriate discussions.
- Ask for the advisor’s assistance with stock donation accounts where contributions can be quickly liquidated and the proceeds sent to you.
Some organizations choose to self-manage nonprofit assets, and if you are doing so, you can still implement many of the ideas outlined here. An investment advisor will charge a fee, typically an annual fee based on a percentage of the assets under management. If you are paying an advisor, it is the responsibility of the committee to ensure that the fee is competitive and that your organization is getting great value from the relationship.
As fiduciaries, you have an exciting opportunity to take positive steps to preserve the legacy of your nonprofit and allow each team member to make a contribution in the process. These are some basic, but fundamental, concepts that can be applied to enhance that experience.
About the author:
Scott Severs is a Principal and the Chief Compliance Officer at Garde Capital in Seattle. Prior to founding Garde, he was a Senior Portfolio Manager at UBS Financial Services, an Equity Analyst at Safeco Asset Management, and an Aerospace Engineer at Boeing. He is a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP). Scott is also an Adjunct Professor of Finance in the Seattle University Graduate School of Business.
Scott Severs, CFA, CFP