The Importance of Regularly Reviewing Nonprofit Investment Policy Statements: Avoiding Common Mistakes
Introduction
Nonprofit organizations play a crucial role in serving communities, advocating for causes, and creating positive impacts. To fulfill their missions effectively, many nonprofits establish investment policies to safeguard and grow their financial assets. However, having a well-drafted Investment Policy Statement (IPS) is only the first step. To help ensure long-term financial sustainability, nonprofits must regularly review their IPS and make necessary adjustments. In this blog post, we will explore how often we believe a nonprofit should review its IPS and highlight common mistakes that should be avoided in the process.
Why Regular Review is Crucial
A nonprofit's Investment Policy Statement serves as a blueprint for its investment decisions. As the financial landscape and the organization's objectives change over time, a static IPS may become outdated and no longer aligned with the organization's needs. Regular reviews are vital for the following reasons:
- Market Dynamics: The investment landscape is constantly evolving, influenced by economic conditions, regulatory changes, and geopolitical events. Regular reviews help nonprofits adapt their IPS to navigate these fluctuations effectively.
- Financial Goals and Risk Tolerance: A nonprofit's financial goals might change as they grow or encounter unexpected challenges. Similarly, their risk tolerance might evolve as they assess their financial capabilities. Periodic reviews ensure that the IPS aligns with the organization's current objectives and risk appetite.
- Transparency and Accountability: Frequent review and updates to the IPS demonstrate a commitment to transparency and accountability, reassuring donors, stakeholders, and board members that the organization's financial decisions are well-considered and up to date.
- Compliance and Governance: Regular review ensures the IPS remains compliant with relevant regulations and meets the highest standards of governance, mitigating potential legal risks.
Frequency of Review
The frequency of IPS review may vary depending on the size of the nonprofit, its investment objectives, and market volatility. However, a general guideline is to conduct a comprehensive review at least once a year. Additionally, certain trigger events should prompt an immediate review, such as significant changes in the organization's financial situation, shifts in board leadership, or major market disruptions.
Common Mistakes to Avoid
- Neglecting to Review Regularly: One of the gravest mistakes is failing to conduct regular IPS reviews. An outdated IPS can lead to suboptimal investment decisions, missed opportunities, and increased risks.
- Ignoring Evolving Financial Objectives: As nonprofits expand their programs or face unforeseen challenges, their financial objectives may change. Not reflecting these changes in the IPS can hinder progress toward organizational goals.
- Overlooking Risk Tolerance: Market fluctuations can impact an organization's financial stability. Neglecting to reassess risk tolerance regularly may lead to investments that are too aggressive or conservative for the organization's current financial situation.
- Lack of Board Involvement: The IPS review process should involve the organization's board members and investment committee. Failure to include their insights may result in a less comprehensive and informed IPS.
- Overcomplicating the IPS: An overly complex IPS can lead to confusion and misinterpretation. Keep the document concise, clear, and accessible to all relevant stakeholders.
- Ignoring Responsible Investing Principles: Nonprofits may want to align their investment decisions with their mission. Ignoring socially responsible and sustainable investment opportunities could conflict with the organization's values.
Takeaway
An Investment Policy Statement is a crucial tool for nonprofits to manage their financial assets effectively. However, its value diminishes over time if not regularly reviewed and updated. By conducting periodic reviews and avoiding common mistakes, nonprofits can ensure their IPS remains relevant, compliant, and aligned with their mission, safeguarding their financial future and helping enhance their capacity to drive positive change in the communities they serve.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
