Is Your Nonprofit’s IPS Ready for a Tune-Up?

For many nonprofit organizations, the Investment Policy Statement (IPS) is an essential, foundational document that directs how an organization’s assets should be managed. A well-written IPS can provide consistency and stable direction over the long term. Still, a surprising number of nonprofit organizations either don’t have an IPS on file or are overdue for an update.

Given the importance of the IPS to the long-term success of a nonprofit’s investment strategy, it is crucial for organizations to consult with an investment advisor on its creation and upkeep. As a Certified B Corporation with a long history of servicing the nonprofit community, we love helping organizations with this important work.

In our more than 30 years of experience working with nonprofits, we’ve learned many best practices that organizations should follow—and pitfalls to avoid—when drafting or updating IPS documentation. We’ve compiled our findings below:

What is an investment policy statement?

An Investment Policy Statement (IPS) is a document that outlines the investment guidelines for a nonprofit organization. It should clearly state the organization’s mission and structure, the types of assets that it can or cannot invest in, the preferred asset allocation mix, and the measures or benchmarks used to evaluate the performance of the investment portfolio. In other words, an IPS serves as a guidebook for a nonprofit’s investments.

Every IPS should start with a mission statement that lays out the organization’s goals and objectives, and how it plans to use the funds at its disposal. The mission statement preserves the spirit of the organization and can serve as a reminder to new board members or advisors as to what the organization is looking to accomplish.

The IPS should also contain a summary of the different endowment, operating and/or reserve accounts held by the organization, including any restrictions or special instructions relating to each. For example, some organizations are required to spend a certain amount from an endowment fund once it passes a certain funding threshold; others may be prohibited from accessing reserve funds for certain activities. Such restrictions should be noted clearly in the IPS documentation.

The organization’s operating expenses and giving needs must be articulated too, along with any restrictions concerning specific investments, such as the use of private alternatives. For example, the IPS may prescribe measures to mitigate downside risk (such as limits on high-risk investments) or maintain certain liquidity thresholds (by limiting or prohibiting illiquid investments).

In addition, many nonprofit organizations prefer to invest in companies or industries that align with their social or environmental goals. This could mean favoring investments that share their goals or prohibiting certain industries or sectors that conflict with their mission. It’s crucial to make these distinctions clear to the investment advisor so they can develop a long-term investment plan consistent with the organization’s values and goals. This ensures that the investment plan remains valid even when a new board takes over or a new investment advisor is introduced to the relationship.

Finally, the IPS should include a range of allocation preferences for accomplishing the endowment’s objectives. These preferences should be consistent with any investment restrictions. For example, the IPS might set a 40% target for stock exposure but allow the advisor to maintain a 10% range above or below that number.

Why is it important for nonprofits to have an IPS?

The IPS serves as a living document that provides consistent guidance for investment advisors and outlines key metrics for board members to measure the endowment’s success. A well-written IPS can also protect board members and the organization at-large by providing clear, objective guidelines with respect to risk-taking, goal-setting, and change management. For new board members, the IPS is a useful resource and introduction to the endowment’s policies and procedures.

Additionally, it’s important to note that the average tenure for most nonprofit board members is about six years (often served out in two three-year terms)¹, which can put the advisor in the unique situation of working across multiple generations of board members (or even entire boards) over a span of decades.

Because of this frequent changeover in leadership, there needs to be a central document that outlines how the organization’s funds will be invested, regardless of board makeup. The IPS should also spell out best practices the organization should follow when navigating through major changes in the financial markets or incorporating new kinds of investments (like private alternatives).

Without such documentation, the investment advisor will be unable to consistently fulfill their obligations to the organization and may inadvertently invest in asset classes that are inconsistent with its mission or financial requirements.

It is also possible that an organization will go through several financial advisors over its lifespan, making the IPS a crucial document when onboarding a new advisor or advisory firm.

Common mistakes and pitfalls

The No. 1 issue that we encounter when reviewing nonprofit IPS documents is that they are not maintained over time. An IPS is not a static document—nonprofits should review them regularly, ideally with an investment advisor (especially if the original author of the IPS is no longer with the organization), to make sure the language stays consistent with the nonprofit’s mission.

Another common issue we see is inconsistent or contradictory objectives, such as stating that the goals of a portfolio are to make stock market returns without taking risk to capital (two potentially contradictory objectives). In some instances, we’ve encountered bloated, overly descriptive, and complex IPS documents, which can further cloud an organization’s objectives. IPSs should be clear and streamlined to efficiently guide an organization’s decision-making.

We have also seen examples of restrictions that limit the investment advisor’s ability to act in the organization’s best interest. For example, an IPS that specifies all fixed income investments must be investment-grade-only might force the advisor to take on undue interest rate risk when interest rates are low. Or, prohibiting the use of broad investment classes, such as private investments, could cause the organization to miss out on otherwise suitable opportunities or be stuck with inferior options that aren’t appropriate for current market conditions.

Some IPS documents set return targets that do not align with the investment allocation requirements of the organization. For instance, if the organization sets an overly cautious allocation target—such as a maximum of 30% in stocks—while the return needed to meet their financial goals would require a higher stock exposure, it may result in the portfolio being unable to meet spending needs and gradually reduce the value of the organization’s assets over time.

Next steps

Regardless of whether the client is a private family foundation or public charity, our process always begins with an IPS review and consultation, offered at no additional cost. After the initial review, we’ll work closely with the organization’s board and/or executive staff to incorporate the necessary improvements, or create the document from scratch if none exists.

To learn more about our work with nonprofits, call us at 310-556-2502 or email info@westmount.com to speak with an advisor.