The Roadmap to Financial Success: Why Every Nonprofit Needs an Investment Policy Statement

By Lisa Neff

Nonprofit organizations often begin when a person or group of people feel a passion for serving a need or for providing a service that benefits the community. Generally, nonprofits are labors of love. However, while their purpose is heartfelt, enduring organizations also require smart leadership and planning to remain viable and serve the mission.

An important part of smart planning for nonprofit organizations is a focused approach to managing investments. That’s why establishing an Investment Policy Statement (IPS) can be a powerful step toward assuring every financial decision aligns with the mission.

Each endowment and foundation is distinct. There is no single objective, set of constraints, or asset allocation that can be applied broadly across all institutions. An IPS serves as a roadmap, outlining the organization's investment objectives, risk tolerance, and strategies for achieving its financial goals. An IPS provides continuity for the organization among board and volunteer turnover, becoming Constitution-like in an effort to guide and cast a vision for the future. 

So, why is an IPS so important for a nonprofit? Here are a few key reasons:

It is a guide to provide clarity and purpose while outlining goals the nonprofit wants to achieve. Whether it's generating income for programs, preserving the endowment's principal, working with donor designated restrictions, or a combination of constraints, the IPS clarifies an organization's financial mission. It ensures all stakeholders are on the same page regarding the purpose and scope of the investment portfolio.

An IPS sets the risk tolerance for the investments. It outlines the guidelines and procedures for investment decision-making, which helps ensure that investments are made in a disciplined and consistent manner. 

The financial world can be bewildering, with an array of investment options, asset classes, and managers vying for attention. An IPS acts as a filter, helping nonprofits lay out criteria for selecting investment managers, ensuring they align with the organization's objectives and risk tolerance. The IPS sets performance benchmarks, making it easier to assess whether the investment managers are delivering the expected results.

Transparency and communication are key to a successful nonprofit. The IPS is the best place to define roles and responsibilities of the board of trustees, the investment committee, staff, and investment managers. It can be shared with donors and key stakeholders to ensure their contributions are being used wisely. This transparency builds trust by demonstrating your organization has a well-thought-out strategy for managing its financial resources providing a clear trail of decisions and actions. 

An IPS isn't a static document; it should be reviewed annually as nonprofits needs change over time. It should be periodically updated to reflect changing circumstances and ensure your investment strategy remains aligned with your goals. 

An institution’s mission, objectives, constraints, and governance structure will form the IPS. It will provide purpose, accountability, risk management, and discipline. With a well-crafted Investment Policy Statement, nonprofits put themselves on a path to financial success with a clear roadmap to navigate the investment landscape. That helps the organization stay on course to deliver their critical services and achieve their heartfelt mission.