A Blueprint for Non-profit Organization Investment Portfolios

It is common for the investment portfolios of non-profit organizations (NPO) to be managed by a board member’s “guy” or “gal” or simply plopped into a couple of index funds such as the S&P 500 by well-meaning board members.

On some levels these options may work out just fine, however, NPOs have a number of unique considerations (some legal) that warrant ensuring the investment portfolio is approached properly. In this article, we outline these considerations so that your organization can proceed with confidence.

Mission

Be clear on the NPO’s mission so you can design the investment portfolio to best support the mission. If the NPO was created to help people through a natural disaster and will therefore be short-lived vs. an NPO that was created to exist in perpetuity such as a hospital, the way their respective investment portfolios will support their missions are very different and deserve different investment approaches.

Investment Policy

Create an investment policy statement, which memorializes the investment strategy and mechanics that will be deployed. This professionalizes the endeavor, prevents misunderstandings, and holds all parties accountable to a disciplined approach.

Spending Policy

Create a spending policy statement, which memorializes how money can be spent from the investment portfolio. This sets expectations, aids in good budgeting, and holds all parties accountable.

Liquidity

Liquidity refers to how easily you can access the funds. Liquid investments such as cash, bonds, stocks, and mutual funds, as well as illiquid investments such as real estate and private equity can all play a role in a portfolio, but a sufficient amount of liquid investments is critical to fund the needs of the NPO.

Diversification

If you are shepherding the money of others (government and donors) for a social cause, being adequately diversified is non-negotiable. Concentrating a portfolio in any one or a few investments introduces an unacceptable risk in a fiduciary setting. Detailing proper diversification is beyond the scope of this article, but it is much more than just not having all your eggs in one basket. It is about having your eggs in a basket, bucket, purse, briefcase, suitcase, and bowl.

Monitoring & Reporting

The investment portfolio must be regularly monitored to ensure adherence to all stipulations such as the Investment Policy and Spending Policy. This monitoring should come in the form of regular reporting so that the status is documented and can be historically referenced.

Donor Restrictions

Donors often place restrictions on how their donations are used. This might be that they be endowed (endowment definition), or that they only be used for certain purposes. These restrictions should be drafted as a contract to ensure mutual understanding and adherence, and these agreements must be accounted for in the investment portfolio. Though NPOs can establish separate accounts and investment portfolios to delineate various restrictions, NPOs often pool investments and simply make the delineations in their accounting.

UPMIFA

If you have any endowed funds, you need to know and adhere to your state’s version of UPMIFA (Uniform Prudent Management of Institutional Funds Act). For a refresher on UPMIFA, please see our August 2024 article on the topic here: UPMIFA article.

Fiduciary

Know that you are a fiduciary. NPOs enjoy tax-free status, because they exist to further social causes, and any profits are kept within the organizations to advance the causes as opposed to being distributed to owners. This structure bears a fiduciary responsibility because funding often comes from the government (tax dollars) and donors specifically to support the cause. A NPO’s staff and board have a legal obligation to handle these funds responsibly.

Overwhelmed?

You don’t need to be. There are institutional consultants, investment advisory firms, and community foundations that are experts in this field so that you can remain focused on your NPO’s cause. These professionals not only ensure you are handling your NPO’s funds properly, but in many cases share or take over some of an NPO’s fiduciary responsibility relieving the NPO of some liability. That said, even if much of the responsibility is delegated, all NPOs should be familiar with these concepts for responsible oversight.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.