The Need

Over the past few years more and more not-for-profit organizations are realizing the need for a welldrafted, formal investment policy. Without a clear policy, directors and management of the organization may be failing in their fiduciary responsibilities. Any organization that has assets to invest needs to have explicit policies to guide their investment activities. By establishing a formal policy that is built around the organization’s specific goals and objectives, directors can be assured of a stable financial future for the organization.

The Process

The process of creating an investment policy begins by defining the overall goals, potential liabilities and long-term financial needs of the organization. Once these are identified, the investment structure can be created to ensure they are met. The establishment of an investment mix or asset allocation is essential in the creation of the policy. Asset allocation is the process of dividing funds between cash, fixed income and equity investments. Most investment policy statements provide for a percentage range assigned to each asset class.

Investment Selection

The directors of charitable corporations and trusts in Ontario are responsible for managing the assets in a prudent manner in accordance with the Trustee Act. The Trustee Act indicates that a trustee must exercise the care, skill, diligence and judgement that a prudent investor would exercise in making investments. A list of acceptable investments is no longer provided by the Trustee Act. Rather, trustees are expected to act in a prudent and reasonable manner taking into account seven criteria:

• General economic conditions;
• The possible effects of inflation or deflation;
• The expected tax consequences of the investment decisions or strategies;

• The role each investment or course of action plays within the charity’s overall portfolio;
• The expected total return from income and growth of capital;
• Needs of the charity for liquidity, regularity of income and preservation or appreciation of capital; and
• An asset’s special relationship or special value, if any, to the purposes of the charity or its beneficiaries.

Financial Goals

The need for liquidity, income or preservation/appreciation of capital is critically important. It requires thorough planning around the goals and objectives of the organization on an ongoing basis. Understanding and evaluating the balance between current cash flow requirements to meet the short-term needs and the long-term goals is essential in the creation of the investment policy for the organization.

Restrictions

The organization may also wish to address restrictions on their investments based on social or ethical concerns in line with the organization’s philosophy and values. Asset quality is also addressed in an investment policy statement. These restrictions, such as limiting exposure to lower quality bonds or illiquid stocks, serve to control the risk of the overall portfolio.

Trustee Accountability

Finally, a well-drafted investment policy outlines the process for the selection, monitoring and review of the investment manager(s) who will make the day-to-day investment decisions. The Trustee Act indicates that the responsibilities may be delegated to a professional money management firm but trustees remain responsible for the monitoring of the manager and performance of the investments. As such, a written policy is essential to meet the requirements of the Act.

Conclusion

Whether a not-for-profit organization has $100,000 or $1million to invest, the creation of a well-drafted investment policy is essential for the organization’s future. The policy should be structured around the goals of the organization and be reviewed and updated on a regular basis. This process is essential prior to allocating any assets to an investment strategy.

This article was provided by Melissa Clark, Wealth Advisor and senior partner with the Clark/van Dorsser Group of BMO Nesbitt Burns. Melissa Clark is an Investment Advisor with BMO Nesbitt Burns Inc. 700-1600 Carling Avenue, Ottawa, Ontario K1Z 1B4. Opinions are those of the author and may not reflect those of BMO Nesbitt Burns. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is an indirect wholly-owned subsidiary of Bank of Montreal. Member CIPF. She can be reached at melissa.clark@nbpcd.com