Getting your not-for-profit’s financial house in order

Reports of multimillion dollar investment losses suffered by charities hit by the global financial crisis have served as a wake-up call for the entire not-for-profit (NFP) sector. Now is the time for NFP boards to put their financial houses in order and develop sustainable investment strategies.

When financial markets are booming, investment selection can seem easy. The market is trending up and your investments are likely to give a good return.

But while it can be tempting to focus on maximising short-term returns, many NFPs have discovered to their enormous cost that they were not prepared for the impact of the global financial crisis. So, how can your organisation be better prepared for the next market downturn?

We have recently seen the catastrophic impact of investment strategies not matched to risk. It is with NFPs that the disastrous results of failing to plan, organise and monitor, can be felt most cruelly.

It is in tough financial times like the past year that NFP services can be most stretched, and if funds have not been invested wisely, there can be little money or help left to give.

Now is the time for your NFP to take stock, reassess your investment strategy and ensure that you are best placed to make use of the financial recovery, maximise your earnings going forward and, most importantly, position yourself to weather future market fluctuations.

A written investment strategy is essential to ensure a clear vision and maintain direction through market fluctuations and changes to any NFP board.

Why your NFP may not have an effective investment strategy:

• The board may see its role primarily as deciding where the money should be spent and directing staff on how to spend the money, with the creation of a sound investment strategy deemed of lesser importance.
• High turnover of board membership can mean that it is difficult to maintain a consistent investment strategy.
• In a group situation, acceptance of personal responsibility is something that can be difficult to achieve.
• It is unlikely that all board members will have financial expertise, but some members of any board need to have this.
• There may be reluctance on the part of the board to engage an adviser.
• The adviser that is selected may be unable to provide unbiased advice.

What is an investment strategy?

It is a documented plan for the distribution of assets among various investments, taking into consideration such factors as your organisation’s goals, risk tolerance and horizon.

Pulling together an investment strategy is not a simple matter. It is not enough to say “An adviser has been engaged, their advice has been received, investments placed and we’ve ensured that they are ethical. Our job here is done!”

Responsible investment management is an ongoing process. The investments must be constantly monitored and reviewed. And if you have engaged an adviser to assist you with this, then the board must ensure that the advice it is receiving continues to be appropriate.

Remember that 85 per cent of the financial planning industry is owned by, or affiliated with, a financial product provider. Selecting an adviser who has an obligation to recommend particular investments can be akin to letting the fox into the henhouse.

Your board should carefully examine whether any advice you are receiving is genuinely in your best interests and in line with your investment strategy.

NFPs should be prepared to pay fees, but should look carefully at what these are. The remuneration structure used by financial planners can be confusing.

Remember that financial planners will always need to be paid for their work, so the lack of an upfront fee is not an indicator of a better deal. Careful inspection may reveal that you are in fact being charged more in commissions deducted from your investment.

In this time of increasingly structured philanthropic giving, often from people with a commercial background, NFPs face a greater expectation of accountability and defined strategy.

NFPs that have a solid investment structure will have improved marketability and be better placed when approached by benefactors. They will be ahead of the pack and have added another point of differentiation to their image and reputation.

To do this, NFP boards need help and they need to make sure that it is of the right variety. Seeking professional and unbiased advice is essential to avoid investment traps and ensure your NFP is not the next one to hit the headlines.