Nonprofit organizations have a fiduciary role in managing investments that are the result of donor gifts. For those with endowment funds, there are laws and regulations outlining fiduciary responsibilities with respect to those funds and how the funds are invested and allocated for expenditure. Large nonprofit organizations with significant investments have the resources to engage large institutional investment managers to assist in managing their investment portfolios. In addition, in many cases, they have board members with the financial background and expertise to assist in the oversight of this activity. But what about small- to medium-sized nonprofit organizations that may not have the scale to attract large investment managers or industry experts for the board? These organizations face challenges to prudently manage their investments to meet the short-term and long-term objectives of the organization in ever increasingly complex financial markets.
Some common scenarios we’ve seen with respect to small- to medium-sized nonprofit organizations include:
- Ultra conservative investments, such as investments in certificates of deposit and money market funds, that don’t keep pace with inflation;
- Investments in certain types of stocks and bonds that do not align with the organization’s plans for the future;
- No separate investment committee of the board and/or adopted investment policies or investment policies that are outdated; and
- Reliance on one board member who may be employed by a financial advisory firm to handle the organization’s investments with little to no oversight.
There are best practices that small- to medium-sized nonprofit organizations can implement to fit the structure and size of their organization without creating a burdensome overhead cost. Forming an investment committee with at least one financial expert is a good start, and could be accomplished by engaging a volunteer with experience in investments if no board members have the necessary expertise. In addition, there are many sample investment policies available on the internet to use as a starting point in establishing investment policies that align with the organization’s goals and plans.
Concerning the types of investments that are best for a small- to medium-sized nonprofit organization, a trusted advisor with significant experience with financial markets is invaluable in providing advice and guidance. Some key questions to ask when selecting and/or evaluating a financial advisor include:
- Does the organization’s current financial advisor truly serve as a “fiduciary”? For example, many stockbrokers and registered representatives only meet the suitability standard, a lower level than a fiduciary who is subject to the loyalty and due care standards to act in the best interest of their clients.
- Are the organization’s investments in alignment with strategic plans, cash flow needs and risks consistent with an established investment policy? For example, alternative investments, especially those with future capital call requirements, can have volatile returns and liquidity constraints that are not an ideal choice for small to medium sized nonprofit organizations.
- Does the composition of the organization’s investment portfolio make sense considering the nature of the investments and related costs? We often observe that many organizations are not aware of “hidden fees” and other costs associated with certain types of investments. One example of this are mark-ups in individual bond portfolios. The price you pay is materially more than what the market is offering.
Obviously, there is no one answer that is best for all when it comes to investments, including determining the ideal portfolio for your nonprofit organization. Board members that do not have expertise in financial markets and investments can be overwhelmed by that responsibility and often times need help in fulfilling their fiduciary role to the organization. Having a trusted advisor that acts in the best interest of the organization is critical and provides small- to medium-sized nonprofit organizations with the experience and expertise needed to achieve their short-term and long-term goals.
PBMares Wealth Management offers small- to medium-sized nonprofit organizations strategic investment guidance, focusing on investing in ways that enable broad diversity, low costs and appropriate levels of risk. Our advisors adhere to the highest legal and ethical standard of practice – the fiduciary standard.
Want to learn more? Contact us to discuss your specific situation and the ways we can assist your organization.