Wealth Insights

Designing an investment policy statement for a nonprofit

Learn which elements to include to tailor an IPS for your organization.

When the markets hit turbulence, inflation drives up costs, or board members’ opinions don’t align, a robust Investment Policy Statement (IPS) helps keep things on an even keel with a disciplined approach to investing — one that assists an organization in aligning its investment portfolio with its long-term mission.

An IPS is a crucial tool for nonprofit organizations and other endowed institutions, making sure your mission is reflected as your investment advisor and staff or investment committee make smart decisions on behalf of the organization. A comprehensive IPS can help leaders balance the conflicting goals of long-term appreciation of investment funds and the desire to spend from the portfolio to meet operating needs. It also can assist with the challenge of focusing individual investment committee members on the organization’s objectives and the circumstances at hand.

What is an IPS?

An Investment Policy Statement is a written document that clearly outlines a client's investment goals, risk tolerance, time horizon and any relevant constraints. It’s a customized, strategic guide for planning and implementing an investment program for an institutional investor.

“The investment policy statement is a road map that describes where you’re going and how to get there,” said Marcus Hopkins, director of institutional consulting for Regions Bank. “When you hit a rough spot in the road, you can go back to the map to see where you are and decide how to adjust. It helps you keep a long-term perspective and takes the emotion out of it.”

What’s included in an IPS?

While Investment Policy Statements can look different based on the client, their portfolio, and their investing goals, details found in an institutional IPS typically include:

1. Governance. This part of the IPS includes the process for updating the document, as well as defined roles and responsibilities.
2. Objectives and constraints. This can include a statement of goals, return objectives, risk tolerance, time horizon, liquidity requirements, and any unique circumstances (such as rules about approval of alternative investments).
3. Portfolio parameters. A detailed accounting of asset allocation and benchmarks, as well as portfolio rebalancing and asset class guidelines, is essential.
4. Risk Management. Control procedures, such as handling of gifts, as well as performance measurement and reporting should be outlined.

An Effective IPS Should:

• Be developed with the advice of an investment professional
• Define general objectives (preservation of principal; growth of assets)
• Delegate day-to-day asset management with independent finance committee and/or a professional manager
• Establish and set asset allocation parameters
• Define and create asset quality guidelines
• Identify the investment manager’s accountability
• Determine a schedule of portfolio and policy review

Special circumstances

The specific needs and goals of each organization should guide the creation of an IPS.

For example, if a nonprofit has short- or medium-term needs for cash, that could be spelled out. Example: “A minimum of 8 percent of the value of the endowment should be invested in highly liquid assets.”

A mission-driven organization might also want responsible or sustainable investing factors to be considered in decision making. Example: “The investment committee believes some industries or securities could pose unusual risks that conflict with the interests and mission of the foundation. Therefore, the committee will exclude investment opportunities in companies that derive revenue from the sale or production of controversial weapons systems.”

While aligning investments with a nonprofit’s mission can be beneficial, there are potential downsides to imposing investment restrictions in a policy that should be carefully considered including limiting investment options, increased complexity or cost, conflicts in prioritization and potentially lower returns. It is important that an organization balance these potential risks with the benefits and weigh the trade-offs between mission alignment and financial sustainability to ensure that their investment strategy supports their overall goals.

If a nonprofit has a need for greater diversification and a longer time to invest, they might consider alternative investments. “Inclusion or exclusion of alternative investments depends on the profile of each organization, with time horizon a key factor,” said Hopkins. Example: “Alternative assets will be kept in a separate portfolio that may include hedge funds, real estate and other illiquid investments.”

Is your organization’s IPS robust yet clear?

As time passes, the stakeholders and maybe even the financial service providers associated with an IPS can change. When the faces around the table are new ones, an effective IPS can keep the investment program on track.

“It’s important that the IPS is detailed and in-depth enough that it provides clear direction, but it can’t be so complex that it takes an advanced degree to understand,” said Hopkins. By avoiding jargon, clearly defining what success looks like, and spelling out roles and responsibilities, you can facilitate a smooth transition for new investment committee members.

Other policies to consider

Some organizations include a spending policy within the IPS document. In general, this type of policy would outline the budget allocation guidelines and an approval process for spending above a certain amount. Other policy documents a nonprofit or foundation should consider creating, if not already incorporated into the IPS, include a gift acceptance policy that guides the process for handling large or complex gifts and a conflict-of-interest policy that details the disclosure procedures for leaders with potential conflicts. The sample IPS we’ve provided below does include spending, conflict of interest and gift acceptance policies.

Keeping policy up to date

Does your current investment policy statement reflect decisions made years ago by stakeholders who have left the organization? It’s a best practice to review an IPS at least annually to be reaffirmed or amended. And if big changes have happened in the markets or in your organization: “A deeper dive is warranted every couple of years to ensure it continues to align with the organization’s goals from an asset allocation perspective,” said Hopkins. “You want to make sure everything is in line and the client is in the best position to meet their goals.”

Investment policy statement examples

Charitable Institutions and Nonprofit Organizations: Download a sample Investment Policy Statement from Regions Philanthropic Solutions group.

Another resource is the CFA Institute’s Elements of an Investment Policy Statement for Institutional Investors.

A solid foundation for an investment program

A well-crafted Investment Policy Statement is the cornerstone of effective investment management for nonprofit organizations and foundations. By providing a clear roadmap that aligns with the organization’s mission, an IPS has the potential to enhance returns while mitigating risk. By periodically reviewing and updating this important document, leaders can ensure the organization adapts to changing conditions.

If you’d like additional guidance, reach out to us or explore our nonprofits, endowments, and foundations capabilities.

Evaluating your IPS

1. Does the IPS include the key sections as outlined in the article?
2. Are primary decision-makers’ responsibilities defined?
3. Are objectives and constraints clearly defined?
4. Does the IPS lay out what success looks like (i.e., benchmarking)?