Financial Health Check for Your Foundation: A Nonprofit Guide to Secure Investments

Conducting a yearly financial exam can be as valuable as the wellness check-ups we diligently schedule with our doctors. It’s a proactive method that safeguards the long-term health and vitality of your financial assets. For non-profit organizations, this endeavor is even more critical, as the stewardship of funds affects your ability to fulfill your philanthropic mission.

In the following sections, we’ll walk through the steps that every non-profit board, CFO, and donor should consider during their annual investment review. From the inception of the investment policy statement to ensuring that your financial advisors are working with the utmost integrity, this comprehensive guide is designed to fortify your foundation’s financial future.

Revisiting Your Investment Policy Statement

The investment policy statement (IPS) is the compass guiding your investment decisions. Like any tool, it requires regular calibration to ensure that it still points in the right direction. Non-profit boards must be cognizant of changes in laws, regulations, or organizational priorities that may necessitate updating the IPS.

First, determine if there have been any amendments to the fiduciary rules that could impact your investment strategy. Next, align the IPS with your current goals. Have your priorities shifted? Are you now funding different programs or eyeing expansion? Make sure your IPS reflects the latest objectives and the time horizon for achieving them.

Scrutinizing Advisor Costs and Fees

Fees can be the silent leech that saps the vitality of your portfolio. It’s crucial to ensure that your financial advisor’s costs are reasonable and transparent. Start by quantifying the fees—beyond obvious charges, such as management fees, look out for transaction costs and performance fees.

Benchmark these costs against industry standards, and if they seem excessive, ask for a breakdown. A competent advisor should be able to justify their fees with clear reporting on how they contribute to the growth of your investments. Remember, for every dollar spent on fees, that’s one less dollar to advance your cause.

Public vs. Private Investment Mix

The balance between public and private investments is a delicate one. Publicly traded securities offer liquidity and the benefits of market regulation, while private placements can yield higher returns with more significant risk and less liquidity.

Evaluate your mix in the context of your foundation’s needs and risk tolerance. A shift may be warranted if, for example, you require more significant funds for immediate grantmaking. Be wary of overexposure to any single investment or asset class, as diversification is the bedrock of risk management.

Asset Allocation as Your North Star

Asset allocation determines how your investments are divided among various categories. It’s critical to ensure that your current allocation is in line with your risk tolerance and financial goals. A common pitfall for non-profits is to lean too conservatively, which may compromise long-term growth.

Dive into the details of your portfolio—where are the assets allocated? Is the mix still suitable, or should you consider rebalancing? A strategic asset allocation keeps your investments on track, weathering the short-term market volatility while aiming for sustainable, long-term results.

The Perils of Being Overly Cautious

Non-profits are generally risk-averse for good reason—the capital you’re entrusted with is meant to serve a higher purpose and shouldn’t be gambled. However, being overly risk-averse can be just as detrimental. In a climate of low-interest rates, especially, excessive caution can lead to returns that are insufficient to keep pace with inflation.

It’s vital to balance prudence with the need to grow your assets in real terms. Inflation eats into your buying power; your investments should outpace it. Consider adopting a more balanced approach, with guidance from a trusted financial advisor who understands the nuances of non-profit investing.

RFPs: The Three-Year Rule of Engagement

Last but not least, it’s essential to reassess the services of your financial advisor periodically. Conducting a request for proposal (RFP) every three years is a prudent practice that allows your foundation to leverage market competition for the best service and advice.

An RFP provides a snapshot of your investment landscape and enables you to evaluate advisory firms without the influence of prior commitments. It’s an opportunity to ensure your foundation is benefiting from the most current thinking and expertise in financial management.

In Conclusion

A comprehensive annual review of your foundation’s finances is not just about meeting statutory requirements—it’s an opportunity to fine-tune your investment strategy to support the causes you care about. By balancing prudence with growth, ensuring transparency and accountability, and staying adaptable to change, your foundation’s finances can embody the very values you champion.

In an age of rapid financial evolution, staying informed and proactive is the best defense. Begin with these steps, and remember, the most valuable currency in our economy of good is trust. Trust in your financial advice, trust in your strategies, and ultimately, trust in your capacity to make a positive, lasting impact on the world.