When it comes to nonprofit investments, it can be difficult to identify what “typical” performance is— or what makes an organization’s investment portfolio an outlier. Many nonprofits plan their investment policies and gauge their performance in a vacuum, without access to benchmark data that shows how similar organizations have managed their reserves and investment performance.
Thankfully, this is changing.
Commissioned in 2012 by Raffa Wealth Management, LLC, the Study on Nonprofit Investing (SONI) provides a wealth of data on investment policies, performance, fees, and other information to help nonprofit organizations be effective stewards of their assets and get a sense for how they compare with other similar organizations.
SONI is a peer benchmarking survey of nonprofits, surveying finance executives from associations, public charities, and private foundations. Now in its seventh year, SONI has over 2,000 participants. The data is segmented by budget size, which makes it much easier for an association to see if its investment policies, fees, and returns are in line with those of similar organizations.
What can we learn from the data?
The biggest lesson from the study is the importance of keeping things simple with a stable and solid, long-term plan.
Take the time to develop clear investment policies and reporting agreements with your adviser, and then stick with them. Unnecessary complexity and volatility occur when well-intentioned board leaders or advisers try too hard to “beat the market,” making hasty or risky decisions with money intended for the good of the organization.
Some of our recommendations for how to keep it simple:
As a board, you need to agree on success benchmarks and stick to them. Consistent benchmarking is the best way to objectively evaluate your investment policy and your investment adviser.
A simple, transparent fee structure understood by executive and board is a critical part of prudent stewardship. Pay attention and ask for simplicity in fees and reporting. Some Boards are paying a lot in fees; others don’t know or understand what fees they are paying. Complex, voluminous reporting may be entertaining for some, but it doesn’t necessarily help the board understand how the organization is doing. Reporting on investment returns should be short, simple and clear.
Developing effective investment policies is the key to success:
- Start with a review of goals and time frames during which investments may need to be used
- Next, segment your assets and establish expectations for your and policies and returns
- Once you have a written record of the policies, expectations, process, and the reasoning behind them, you can begin implementing and reporting as agreed.
What about best practices?
The last seven years of SONI data and our work with nonprofits have resulted in four best practices nonprofits can follow to help them keep things simple and effective.
- Align investment policies with the time frames related to various organizational goals. For instance, if you are buying a building or important piece of equipment, be clear on the time frame and how your investment dollars are allocated for this purpose. The organization may have spending goals with short, intermediate, or long-term timelines. The policy should be clear about these distinctions.
- Document procedures that lead to policy guidelines related to risk tolerance. Because board members rotate, it is important for future board leaders to know what risks were on the board’s mind when it set its investment policy and the process by which that policy was made. This helps inform future discussions of the policy.
- Document reviews as frequently as necessary.
- Require reporting that makes oversight simple. There are two goals for reporting: to make sure investments are compliant with your policy and that performance is in line with your expectations.
Nonprofit boards and staff have a fiduciary responsibility to be good stewards of their organizations and finances. Regularly reviewing components of your investment portfolio, such as net performance, reserve size, and investment fees and benchmarking these indicators against organizations of similar size can be an extremely useful tool to help.
Visit the SONI Website to take the survey to add your data to the mix!
Then, take advantage of the free SONI report to help you determine if you’re on the right financial path.
If you’re unsure about where you are in relation to where you want to be, get in touch with the experts at Raffa. We’ll make sure you get there.
Written by Kate deLacy, Director of Communications at Raffa Wealth Management
Photo by yupiramos