What kind of guidelines does your association have around its investment policies?

This was a question posed by the recent “Study on Nonprofit Investing” (SONI) [ available to study participants only], conducted Raffa Wealth Management. In somewhat of a surprise, the survey of more than 150 finance executives from trade associations, public charities, and other nonprofit organizations found that, for a significant amount of nonprofits, the answer was “little to none.”

“We were most surprised by how many organizations lacked clear investment guidelines on benchmarking, diversification, and even guidelines to address who is ultimately responsible for investment decisions,” Dennis Gogarty, president of Raffa Wealth Management, said in a statement.

For example, while 81 percent of respondents reported having an investment policy statement, the study also found:

• 38 percent do not include guidelines requiring sufficient diversification
• 43 percent do not specify the amount of discretion given to outside advisors
• 80 percent do not include language to take action should reserves fall below or rise above a certain threshold.

Lacking clear guidelines raises the potential for unnecessary risk and lower returns.

Almost half of respondents reported that their organizational investment policies do not include benchmarking guidelines. The average investment return for these organizations trailed those organizations whose policies do measure performance results.

Lacking policy guidelines also leads to a tendency to time the markets, Gogarty said. The 30 percent of organizations that changed their asset allocations in 2012 reported lower returns on investment.

The SONI survey additionally looked at the state of respondents’ reserve funds—another area that can benefit from having a clear policy, according to Ann Marie Etergino, senior vice president at RBC Wealth Management; Guy Fogleman, executive director of the Federation of American Societies for Experimental Biology; and Andrew Powell, a partner at Halt, Buzas, & Powell, Ltd.

During the session “The Use and Abuse of Reserve Funds” [PDF] at the recent ASAE Finance, HR & Business Operations Conference, Etergino, Fogleman, and Powell acknowledged several problems associations can face with reserve funds, including making regular withdrawals without having a formal spending policy, confusion around short-term and long-term investment objectives, and using long-term reserve funds to help cover short-term operating deficits.

To help curtail such challenges, Etergino, Fogleman, and Powell recommended creating a policy that delineates the level of reserves desired, how and when to use reserves, and how to invest those funds.

The session leaders also recommended reviewing investment policies annually, which about half of the SONI respondents reported doing. The survey also found that 75 percent of associations met their minimum reserve goals in 2012.

Where does your organization rate in terms of its investment policy?

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