To Educate | To Inspire | To Connect
Over the past 20 years we’ve hosted regional conferences for non-profit organizations. The mission of these events is “to educate, to inspire, and to connect.” At the end of each conference, we ask attendees to complete an evaluation form to help us tailor future events to their most pressing needs. Of all the topics we have presented over these two decades, the one that persists is the need for a better and sustainable investment strategy.
The focus on investments is not the most engaging aspect of non-profit governance. Previous year’s topics such as “Digital Media Strategies,” “Leading with Intent,” and “Tackling the Overhead Myth” seem more impactful. But without an effective investment strategy, your organization’s precious resources may not be protected and optimized over time.
IPS: Your GPS in Perpetuity
Best practices as well as a board’s fiduciary duty require any investment strategy to be articulated clearly through an investment policy statement, or “IPS.” This is your roadmap for your current — and more important — your future board to use in order to help you navigate through all types of economic cycles. While it’s common for at least one board member to have deep experience in the financial services industry, there are no assurances that will always be the case. Thus, think of the IPS as your investments’ GPS in perpetuity.
Key Elements of Any IPS:
- Setting the ‘legend’ for your IPS roadmap. This section is where the objectives, policies and guidelines are established.
- Delegation of Responsibilities. Most boards delegate the management of the organization’s funds to a professional investment advisor. This is because certain laws adopted in every state (except Pennsylvania) known as uniform codes. One such code “UPMIFA,” (the Uniform Prudent Management of Institutional Funds Act) shifts the majority of the responsibility for management of the assets from the board to a professional advisor.
- Board Responsibilities. This section describes which board committee will have oversight of the funds management and will create, adopt, and periodically review the IPS.
- Management Responsibilities. An organization’s management usually is the interface with the outside advisor, custodian, and all day-to-day operation of their investments. This section details the accounting, auditing, due diligence, reporting, and compliance requirements.
- Investment Considerations. This section is the meat and potatoes of the IPS. Your advisor will help frame this discussion, but ultimately, the board must provide guidance on risk tolerance, investment objectives, allowable investments, restricted investments, expected returns, cash requirements, mission-driven investments, and more. The vast majority of time is spent on this section. Therefore, the best advice we could offer any organization about this is, keep it simple. It’s not uncommon for a board to have varied levels of financial literacy. You want to make sure you appeal to the lowest common denominator since each board member is jointly and severally liable for the prudent management of the funds. If the organization wants to recruit and retain the best board members, it thus cannot afford to throw those with lower financial acumen under the bus with a complex, esoteric investment policy that few can comprehend. Even some of the nation’s largest endowments maintain straightforward investment policies with clear language, devoid of most financial jargon.
- Performance Measurement. This very simply states what benchmark your organization will use to assess your performance.
- Spending Policy. While some organization’s spending policy is a stand-alone policy, the trend is to incorporate it within the IPS. The goal is to draw a realistic minimum amount (expressed as a percentage) from the portfolio each year. Therefore, the corpus can continue to grow and flourish in perpetuity on an after-inflation, after-expenses basis.
- Donor Restrictions. Without donors, most non-profits would cease to exist. It’s therefore critical that an IPS includes a section on donor restrictions. Donors may direct how their gift is spent, whether or not income and appreciation can be spent or just income.
- Annual Review. Make sure your board or a subcommittee reviews the IPS annually. Boards and markets change, and sections of your IPS may need to reflect these changes.
It’s important for boards to understand that their organization’s funds may have three potentially competing interests: 1) protecting the value of the assets; 2) growing those assets to increase their value over time; and 3) maintaining an element of liquidity to access those funds. Therefore, a well-designed and thoughtful IPS can help your organization address these issues and help you fulfill your fiduciary responsibility.
What You Should Do Next:
- Contact us with any questions or concerns about your organization and/or its Investment Policy Statement.
- Visit our page on who we help: foundations and endowments.
- Click here to learn more about the ClearRock approach and process.
- Speak with one of our Senior Advisors.
Some material in this article is based on information from a variety of sources we consider reliable. However, we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from ClearRock Capital, LLC. If the reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, then he/she should consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.