The overall mission of all nonprofit entities is to improve the lives of the communities and groups they serve, but the specific mission of your nonprofit and how you go about that mission is unique to your organization. Similarly, while it might seem like there is a best practice for how all nonprofits should manage their investable assets, the truth is there is no single approach that works best. Your ideal approach to investing is the one that is in tune with both the current and long-term missions of your nonprofit entity.
If you hold a leadership position with a nonprofit, you are personally held to the fiduciary standard when acting on behalf of the entity – that is to say, as a board member or officer, you are charged with putting the nonprofit’s interests above your own when acting on behalf of the organization. While the specific legal requirements are beyond the scope of this article, one section of the Washington state law says that you have a “duty of loyalty” that includes investing funds “in good faith and with the care an ordinarily prudent person would exercise under similar circumstances” (RCW chapter 24.55).
The “prudent person” concept might seem a bit vague initially, but start by putting yourself in the place of the nonprofit – as a prudent person, how do you decide on your own personal investment strategy?
First, you develop some sense or plan of what you want to achieve as an individual or family over both the short-term (next 12 months), and the long-term. For example, you know that certain living costs need to be covered each year, therefore some of your investments should be held in a bank account where they are easily accessed for ongoing expenses and unforeseen emergencies.
You also know that it is prudent to look beyond the next 12 months and invest for long-term goals and needs such as college education, retirement, and possibly long-term care costs. There might also be a separate savings or investment pool designated for mid-term needs or those that you know will come eventually (e.g. vacations, car replacement, home repairs, etc.).
This is exactly how board members and officers invest on behalf of the nonprofit entity – in a way that a group of ordinarily prudent people would act under similar circumstances.
Once the short-term and long-term missions of the organization are clearly understood and documented, investment decisions must be aligned with those missions. Here is a real-world example.
A nonprofit entity has an overall mission of supporting a wide variety of charitable activities in their community. The short-term mission of the organization is to vet and administer multiple grants each year on behalf of their donors, and to increase public awareness and support of their organization through outreach and fundraising. However, this nonprofit also has a much longer-term mission: to prudently invest donor resources in order to generate enough income to support making grants to future generations as well.
For this organization and most other nonprofits, defining the cash flow needed to support current vs. long-term needs or goals will give them a good starting point. It allows for separating their assets into multiple buckets, each having a different investment profile (i.e. risk vs. reward balance) based on when the funds are needed.
This organization would hold some cash in bank accounts to cover several months of operating costs, as well as cash for grants they expect to make within that timeframe. They then would invest enough in other vehicles, such as CDs or short-term bond funds, to cover another four years of grants. Holding these relatively safe investments to cover all of their medium-term mission needs and goals gives them the freedom to be more aggressive with the remaining assets intended for the long-term mission. These assets should be invested in globally diversified stock funds that contain more market risk from year-to-year, but have also historically shown the potential to generate returns well above the rate of inflation over 7- to 10-year market cycles.
If your fiduciary obligation as a board member or officer in relation to investing the nonprofit’s assets is still unsettling to you, keep in mind that the organization’s leadership can use the services of a professional investment manager to meet this requirement as long at the advisor you choose is also legally held to a fiduciary standard.
Whether you are directly involved in the management of your nonprofit’s investable assets, or you engage the services of a professional investment manager, the approach is the same. Start by understanding the specific current and long-term missions of the nonprofit entity, then align the investments based on those missions.
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