Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Non-Profit Boards: Exploring Best Practices
Published Date : April 21, 2014
For over 20 years, Sand Hill Global Advisors has been privileged to serve as an investment advisor to non-profit organizations and to assist in furthering the many admirable missions of these institutions. Our deep experience in this space has informed us of many best practices for boards, and specifically investment committees. This level of understanding allows advisors such as Sand Hill to better leverage their professional expertise beyond simple stock picking.
A known challenge for any non-profit is that membership turnover within the investment committee is a near certainty, which means that assets dedicated to the long-term mission are subject to the relative short-term tenure of those providing investment oversight. It is thus imperative that a thoughtful and robust Investment Policy Statement (IPS) be constructed to serve as a governing document and guidance for future committee members. An investment advisor, steeped in fiduciary principles and exposure to peer organizations, can very valuable in the collaborative process of creating an IPS.
At the heart of an IPS is the asset allocation, a key determinant of portfolio returns. Ranges around asset classes should be adopted allowing for discretionary decisions by an investment manager while at the same time protecting assets from emotional decisions in turbulent markets and accounting for risk. Allocation bands also prevent the personal preferences of committee members from seeping into the organization’s investments while also ensuring allocations are aligned with peers, a fiduciary best practice. An advisor plays an instrumental role in these allocation decisions by providing counsel backed by professional investment expertise and, upon adoption, overseeing the implementation and adherence to the allocation.
Withdrawal rates to fund vital programs today must be balanced against their potential to alter the long-term sustainability of the mission and be reasonable relative to the overall portfolio size and allocation. Armed with historical market data and a current economic outlook, an investment advisor can test a multitude of scenarios to arrive at optimal spending rates as judged against the asset allocation, risk tolerance, and constraints of the IPS. Once in place, the manager should continue to monitor market conditions and test the assumptions of the withdrawal plan to ensure long-term sustainability.
Asset allocation and withdrawal rates, combined with the short and long term aims of a non-profit, ultimately determine the overall size of an investment, or endowment, account. Generally, the larger the investment account, the more sustainable the mission. The investment account expands partnership opportunities, magnifies awareness and advocacy, and extends the impact of the mission. There is no established best practice, but typically most non-profits think about account size relative to their operating budget with investment accounts ranging from 1x to 20x an operating budget.
Regardless of asset allocation, withdrawal rates, or endowment size, all non-profits should be fee sensitive as fees, over the long-run, are a key deterrent to investment returns. It is important that an independent advisor, governed by the fiduciary standard, is enlisted to seek out cost efficient investment vehicles while generating minimal transaction fees.
Finally, those serving on investment committees must, at all times, meet the fiduciary standard with the actions they take. Investment advisors, well-versed in the intricacies of institutional money management with exposure to non-profit peers, can offer fiduciary training that not only protects the assets of an organization but those individuals volunteering as well.
If you serve on a non-profit board and the issues discussed here resonate with you, Sand Hill professionals would be happy to review your Investment Policy Statement, portfolio asset allocation, fees, performance and service standards.
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