In the world of nonprofit governance, fiduciary responsibility is one of the most crucial obligations for board members and finance committees. Fiduciary standards of loyalty and care are fundamental to protecting the organization’s financial health and mission. A key tool in managing these responsibilities is the Investment Policy Statement (IPS). This document serves as the blueprint for how a nonprofit manages, monitors, and evaluates its investment portfolio in alignment with its goals.

For nonprofits, financial stewardship is more than a regulatory requirement — it's an ethical duty. Organizations often rely on a combination of endowment funds, grants, and donations to further their mission. These funds need to be managed carefully to ensure both growth and sustainability.

As such, fiduciaries are expected to act in the best interest of the organization, and an IPS is the document that helps guide their investment decisions. Furthermore, the benefits of an IPS are that (1) it supports the “paper trail” in the event of an audit, litigation or other dispute, and (2) it supports continuity through changes in membership of both the Board and Finance Committee.

The Role of the Investment Policy Statement (IPS)

An IPS is a governing document that outlines how a nonprofit’s assets should be invested. It sets parameters around asset allocation, acceptable risks, liquidity needs, and performance benchmarks. For fiduciaries — whether they are board members, investment committees, or staff — an IPS serves as a vital tool to ensure that all investment decisions align with the organization's long-term financial strategy and mission.

The IPS typically includes:

1. Governing Body of Law:  In the case of foundations and endowments, this is the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
2. Duties and Responsibilities of all parties involved: The parties include the Board, Committee, investment advisor, custodian, and money managers.
3. Investment Objectives: These are the nonprofit's financial goals, which may include preserving capital, generating income, or growing the endowment.
4. Risk Tolerance: The level of risk the organization is willing to accept, which may vary based on factors like time horizon, liquidity needs, and overall financial health.
5. Asset Allocation: Guidelines on how to diversify the portfolio across different asset classes (e.g., equities, bonds, real estate) to balance risk and return.
6. Performance Metrics: Benchmarks against which the portfolio's performance will be measured, typically relative to a market index or peer group.
7. Rebalancing Rules: Strategies for rebalancing the portfolio in response to market movements or changes in the organization's financial situation.
8. Monitoring Criteria:  Defines the due diligence criteria for selecting and monitoring investment options.
9. Ethical Considerations: For nonprofits, this section may include socially responsible investment (SRI) guidelines or environmental, social, and governance (ESG) factors that align with the mission.

Fiduciary Duties and the IPS

Fiduciaries of a nonprofit, such as board members or members of the investment committee, are legally bound to act in the best interest of the organization. The duty of care requires that they make informed decisions based on adequate research and due diligence adhering to the organization’s mission and governing documents, including the IPS. The duty of loyalty compels them to put the organization’s interests first, avoiding conflicts of interest.

An IPS helps fulfill these fiduciary duties by providing a clear, documented strategy for managing the organization’s investments. When making decisions, fiduciaries can refer to the IPS to ensure they are acting in line with the organization’s long-term financial goals. This helps mitigate the risk of mismanagement, which could otherwise lead to a breach of fiduciary duty.

Training and Education: A Must for Fiduciaries

Despite the existence of an IPS, effective fiduciary governance requires ongoing education and training. Nonprofit board members and financial committees may not always be investment experts, which is why it is critical to provide education on the fundamentals of investment management, risk assessment, and fiduciary responsibilities. Workshops, seminars, and professional consultations can enhance their ability to interpret the IPS and make sound financial decisions.

Nonprofits can also benefit from having external advisors, such as investment consultants or legal experts, who provide objective advice and ensure that the organization is adhering to both its IPS and broader fiduciary obligations.

Conclusion

A well-crafted IPS is a cornerstone of effective fiduciary management for nonprofits. It ensures that investments are handled in a way that supports the organization’s mission while managing risk and maximizing returns. Board members and fiduciaries must not only understand the IPS, but also commit to ongoing education to responsibly navigate the complexities of nonprofit investment management. Through this proactive approach, fiduciaries can safeguard the financial future of their nonprofit and its ability to serve the community for years to come.

If your team needs guidance on creating a strong IPS, contact McKinley Carter's Nonprofit Advisory Services division. We're here to help!