Prudent Investing for Non-Profit Organizations

According to U.S. Trust Wealth, there are three main components for Non-Profits investment:

  • Uniform Prudent Management of Institutional Funds Act (UPMIFA)
  • The Investment Policy Statement (IPS)
  • Fiduciary Standard

As far as investments are concerned, charities, foundations, and other non-profit organizations have most of the same goals as individual and business investors. Safeguarding capital, managing risk levels, reasonable projected income opportunities, as well as the strong possibility for long-term wealth building are all aspects that charitable organizations deem most important. But there are also major differences. The purpose and tax-exempt status of nonprofits make them unique from all other types of investment entities. There is a wide range of regulations and restrictions that make investing for nonprofits a very complicated process, as they need to make sure they remain within the confines of the laws as well as maintaining fidelity to their own mission values as an organization.

Uniform Prudent Investments

Investments by charitable organizations are regulated under the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Portions of UPMIFA have been adopted by all US States except Pennsylvania and serves to improve upon rules that were first established in 1972, now establishing investment and money management principles for nonprofits and for firms that invest on their behalf. Every charitable organization must start by setting the framework around their investment strategies. This comes even before selecting the assets that will be included in the organization’s portfolio. To begin establishing this framework, a selected investment committee should carefully consider and provide detailed answers to the following questions:

  • What is the complete mission and purpose of the organization? Use clear detailed terms to express the organization´s purpose and the complete mission it seeks to fulfill, and the works it plans on supporting.
  • What are the objectives that have been established for the Investment Committee? What does the organization plan to accomplish through their investment strategies? Consider in your answer balancing out current investments with long-term goals of the organization´s spending and inflation.
  • What is the organization’s risk tolerance level? Risk Tolerance simply means an investor´s ability or willingness to accept declines in the prices of investments while waiting for them to increase in value. The answer to this question will help define the overall investment strategy of the organization.
  • What are the liquidity and spending policies of the organization? What is the yearly budget to maintain the operation and mission goals of the nonprofit activities? Before making decisions on investments, an understanding of liquidity must be acquired to assure healthy functioning of the charitable organization today while also assuring its expansion into the future.

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Investment Policy Statement

The Investment Policy Statement (IPS) is a guidebook for the investment committee to follow and is also a gauge for regulators to know if the organization remains inside their investment framework.

  • The IPS summarizes an organization´s investment fund and objectives and whatever constraints might preclude certain types of holdings. The IPS also helps measure the timed goals as it balances out its investment risk.
  • There are three basic factors that will help determine the overall investment strategy: the organization´s income (from donations, grants, and other sources) its spending, and the investment gains that are needed to support that spending.
  • Income considers not only how much money the organization receives each year, but also how predictable each income source is. It must also consider how much control the organization has in guaranteeing these sources and the changes that may lie ahead in the near future. Because of fixed rate spending (ie. 5% per year), major donations will be organized mostly into investment planning instead of being spent immediately. Similarly, a spending investigation takes a look at how much an association spends every year, the consistency of that spending, and whether the association has the adaptability to climate a period of emergency without upsetting its mission.
  • Considering an organization´s profiles for income and spending, required return is understood to be the minimum return that must be achieved to maintain its operation. Understanding this principle can help guide the investment committee as to whether a highly conservative approach (ie, holding only US Treasuries) can meet those objectives. If not, what other options are available to earn a higher return while still remaining within the organization´s risk tolerance level?

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Fiduciary Standard

A key component of a nonprofit investment committee is their financial services company that handles their investments. These financial services corporations serve as fiduciaries, meaning they are bound to act in the best interests of their clients in all investment advice, and to whom it may also be granted the power to make decisions on their client’s behalf.

  • While all fiduciaries must act in the best interest of their clients, those serving nonprofits must go a step further, by taking careful consideration for the long-term financial well-being of the organization and their ability to carry on their charitable activities.
  • In order to fulfill their jobs accordingly the fiduciary must be intimately related to their client’s investment policy statement, and familiar with their financial profile as well as their operations, charitable activities and services. The main purpose of the fiduciary is to help develop an appropriate financial strategy and assure that their client stays within the bounds of all legal regulations as well as the organization´s overall mission.
  • A trustworthy fiduciary will pay attention to the organization’s IPS and portfolio to assure that all investments stay within the overall strategy and that liquidity for the operation is maintained.
  • Because planning, evaluating and executing an investment strategy can be burdensome and excessive, the investment committee, the fiduciary, and the regulators all work together to achieve the overall goals of the organization. Through everyone´s hard work and cooperation, they can together fulfill their mission as an organization and make a better world.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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