The most common questions we hear from our non-profit clients when they first connect with RTD are: how do I know what our investment policy should be for our long-term reserves, and, is our current investment policy still appropriate for the long-term reserves of the organization?
While these are complex questions with many variables, the questions often stem from the same issue: volunteer leaders are not aware or not aligned on the purpose of these investment reserves in the first place. In fact, our first response to these questions is to follow up with questions of our own: can you help me understand why the reserves are being managed the way they are? Or, can you tell me why the investment policy is what it is today?
The vast majority of clients offer one of these three answers:
- I honestly don’t know.
- That’s how the reserves were managed or that’s the policy that has been in place since I joined the board.
- That’s what our advisor (money manager) recommended in the past that we do.
What do each of these responses really mean?
The first response is pure and blunt honesty, but unfortunately might also be an admission of a lack of engagement, or more likely, that they “don’t know what they don’t know.” In our experience, most volunteer leaders in the non-profit world don’t fully understand the role of serving as a fiduciary on a board or finance committee. Altruistically, it’s often their passion or commitment to the cause of the organization that was their primary motivation to get involved. In addition, they often are not provided with the necessary education and training to know how to act as a financial steward or what questions to ask.
The second answer is another common response we run into with volunteer leaders of non-profit boards and committees who don’t want to “rock the boat” or challenge the status quo. In many cases, this may also be the first time they have been on the board or finance committee of an organization with sizeable investment reserves, so they don’t have the experience to know the right policy from the wrong policy. However, they often understand there should at least be some policy followed.
In our experience, while the third response defers to “prudent experts,” it often signals a lack of ongoing review with the board or finance committee of whether the investment policy is still appropriate. Even if a well-thought-out plan was put into place, if it’s not reviewed and reinforced as board members turn over, eventually, no one remaining on the board understands how or why they chose that plan in the first place.
What each of these responses has in common is a lack of understanding of the long-term goals for the reserves as well as a lack of services and education from their current financial partner. The role of a financial partner should be to validate and educate the board or finance committee on an annual basis about if the current approach is still the most appropriate to help the organization reach or maintain these goals. However, most large, well-known institutional investment firms that work with non-profits are focused on the money management component, but rely on the organization to dictate to them what the investment policy should be or when it should change. While this works well for their larger non-profit organizations with the resources and knowledge in-house to fill in these service gaps, for most of the non-profit industry, they do not possess these resources or knowledge in-house to effectively to address these questions.
Many organizations would be better served working with a specialized fiduciary advisor focused on the needs of non-profits, one that can offer more than just money management and investment policy development. RTD’s approach starts with our nearly 40-year history in goal discovery and financial planning. We work with the board or finance committee to first uncover and align with the ultimate purpose(s) for the money, then run financial modeling scenarios to help them understand and achieve the necessary investment returns to reach these long-term goals. The result is that our clients’ board and finance committees have the necessary information to understand why the selected risk/return and investment mix is in indeed the right investment policy for the organization at this time.
While this is where the services of many non-profit advisors or money managers start, they then stop once the portfolio has been crafted and setup for ongoing management. RTD believes that in addition to this, it is critical to revisit the financial modeling and investment policy annually to see if any changes are needed, and to offer an education session for new board and finance committee members on the how and why of past decision making.
The result of RTD’s offering is that when we ask our non-profit clients’ boards and finance committees this same question in our annual meetings, we get a much more thoughtful and engaged response than one of the three outlined above. With that, this also means our volunteer leaders are fulfilling their fiduciary duty to the organization by consistently doing what is in the best interest of the organization, because they were provided with the right tools and information to do so.
If you or your organization are asking these same questions, or your volunteer leaders are providing one of the same three responses above to these questions, we encourage you to reach out and setup a complimentary virtual meeting or phone call to discuss further. You can do this my emailing us directly at firstname.lastname@example.org, or visit us on our website at https://www.rtdfinancial.com to learn more.