So, you’ve done the hard work to solicit donations, earn grants, and run successful fundraisers for your nonprofit. As a result, you’ve grown your programs and established a significant rainy day reserve fund.
While that’s an effort worth acknowledging, don’t stop there. Nonprofit investing is just as important (if not more so) as the fundraising practice itself. Alongside other fundraising activities, a well-managed investment account can help nonprofits fund specific projects and reach long-term viability.
This guide will look at the basics of nonprofit investing and the necessary elements to start growing your giving through investing. We’ll address the following topics:
- Nonprofit Investing FAQs
- Why Should a Nonprofit Invest? Nonprofit Investment Goals
- How Do Nonprofits Invest? Steps to Nonprofit Investing
- What Should a Nonprofit Invest In? Value Alignment Investing Strategies
- What to Look for in Your Nonprofit Investment Management Tools
Investing your nonprofit’s money may seem daunting at first. But with the right strategy and resources, it doesn't have to be. Let’s dive in!
Nonprofit Investing FAQs
Historically, investment resources have not always been accessible or easy for nonprofits to understand. As a result, many people have misconceptions and misunderstandings about the nonprofit investing process. Before breaking down the investing steps, let’s take a quick look at nonprofits’ biggest investing questions.
Can a Nonprofit Have an Investment Account?
Yes, nonprofits can have investment accounts, also known as brokerage accounts, and there’s likely no reason your nonprofit shouldn’t have one. In fact, registered 501(c)(3) organizations are generally exempt from paying federal income tax on investment portfolio dividends and gains.
Thus, a nonprofit’s investment account has built-in, money-saving value over those of for-profit businesses. Your tax-exempt status increases your overall return potential and allows you to change investments without significant tax implications.
Can Nonprofits Invest in Stocks?
Like most organizations, nonprofits can invest in stocks, and many do as part of a well-rounded investment strategy designed to generate revenue to support their mission. Moreover, nonprofits can also invest in a number of other types of assets, such as bonds and crypto.
However, to avoid violating U.S. Securities and Exchange Commission (SEC) regulations, your investments should not benefit your nonprofit’s employees or board members.
According to the IRS’s inurement policy: “A section 501(c)(3) organization must not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests.” For example, your nonprofit shouldn’t buy stock in a board member’s company to help boost their earnings.
What Is a Safe Place to Invest Nonprofit Funds?
You (hopefully) wouldn’t hand your wallet over to just anyone. You’d want to trust the person holding your money and know they’d do their best to grow your investment. Similarly, be selective with where you invest your nonprofit’s funds.
Choose a Registered Investment Advisor (RIA) who meets SEC compliance requirements to mitigate risk. Unlike other types of financial advisors, such as broker-dealers, RIAs have a fiduciary obligation to act in your nonprofit’s best interest and offer you the lowest-cost products that meet your needs.
Why Should a Nonprofit Invest? Nonprofit Investment Goals
According to research from the MIT Sloan School of Management, only 11.2% of nonprofits hold investment accounts. That means nearly 90% of nonprofits aren’t putting their funds to work and are hampering their ability to achieve their mission. With the current inflation rate, for most nonprofits with reserve funds in a simple money market, CD, or savings account, these reserves are actively losing value.
For many nonprofits, the prospect of their hard-earned funds decreasing in value is enough of a reason to build an investment portfolio. However, your organization may want to get more specific on exactly what you hope to achieve from investing—beyond simply preventing your assets from losing value.
Just as nonprofits fundraise for different reasons, each may have specific goals for investing their reserves. Generally, these goals fall into one of three buckets:
- Building Assets. Especially if you don’t own much capital, funding an investment portfolio can bolster your balance sheet and give your nonprofit both more legitimacy and spending power.
- Long-Term Saving. While you might be investing to build assets for large capital investments, you may also choose to invest without any particular project. In this sense, rather than losing value in a low-interest rate bank account, you can invest for the simple goal of long-term financial stability.
- Courting Large Gifts. Major donors often want their large gifts to have a long-term impact. Moreover, they may look to your assets to confirm your financial health. An investment account—especially one that readily accepts endowment and securities donations—can encourage those large gifts by showing your nonprofit’s plan to use their donation wisely for many years to come.
Ultimately, your investment goals will depend on various factors, including your timeline, current assets, and regular fundraising behavior. Plan to address these factors in routine conversations with key stakeholders, your board of directors, and your Registered Investment Advisor.
How Do Nonprofits Invest? Steps to Nonprofit Investing
Congratulations! We’ve made it to the point where you may be ready to start an investment account for your nonprofit. Below, we’ll walk step-by-step through what it takes to invest in your nonprofit.
Step 1: Develop Nonprofit Investment Governance Policies
Before nonprofits invest their money, they need clear governance policies that address their investment account strategies and management policies. Nonprofits collect these policies in a document called a nonprofit investment policy statement, which is a roadmap for how an organization wants to invest its money.
Your policy statement should include the following details:
- Roles of Investment Committee. Summarize the roles, responsibilities, and limitations of stakeholders (e.g., Board of Directors, Oversight Committee, and Executive Director) accountable for overseeing and managing a nonprofit’s investment portfolio.
- Investment Objectives. Define the primary goals for the investment portfolio, the long-term target rate of return, and the potential risk allowed.
- Investment Policies. List the types of investments allowed/prohibited and the target percentages of funds allocated to each type.
- Performance Measurements and Reporting Standards. Outline the standards and frequency by which the Board of Directors will measure and report on fund performance.
- Spending Policies. State all uses, benefits, purposes, and factors relevant to spending the nonprofit’s investment funds. Include guidelines for how, why, and when funds can be added to, withdrawn from, and reallocated in the investment account.
- Donor Restrictions. Clearly state that the investment committee agrees to all stipulations made by donors for how their funds are used and invested.
To make your life easier, we’ve developed a free investment policy statement template that we encourage nonprofits to use to create their governance policies. However, resist the urge to fill this out and never think about it again. Your investment policy statement should be a living document that operates in conjunction with your strategic plan, bylaws, and statement of activities. Alongside your Board of Directors and your Registered Investment Advisor, continue to revise these statements as your nonprofit's needs and circumstances change.
Step 2: Deciding Where to Invest
Once your nonprofit has a sound investment plan, it's time to decide the provider and tools you’ll use to invest your money. While you may be most familiar with big bank investing, technological developments have led to a range of new, powerful investing methods.
For nonprofits of any size, big banks can offer a traditional investing experience. However, “traditional” isn’t always best. When deciding if a big bank is right for your nonprofit investing, consider that big banks:
- Are well-established organizations with name recognition.
- Often have high fees to cover their overhead.
- Are a traditional industry that requires extensive paperwork.
- Use a heavy sales process upfront.
- Require long timelines to get things done.
- Have a middle man between you and your money.
- Can make fund transparency and access difficult.
A 2020 report demonstrated that over 15 years, nearly 90% of actively managed investment funds failed to beat the market. According to Business Insider, just last year, “passive funds reached a higher asset total than active funds. This is evidence that most people understand that passive funds are the right place for the bulk of their assets.”
Knowing that information, should a nonprofit leverage active management? And why does passive management need a person that requires high fees? When deciding if a wealth advisor is suitable for your nonprofit, consider that actively managed investments:
- Often underperform the market.
- Require choosing a wealth advisor, which can become highly political and messy for relationships in nonprofit boards.
- Usually have high fees (generally 1% or higher).
- Have a middle man between you and your money.
- Can make fund transparency and access difficult.
You can absolutely invest directly through Fidelity or Schwab. It brings you directly into the investment process and cuts down on fees, but it can also be very confusing and comes with great fiduciary responsibilities for nonprofits. DIY investing:
- Can reduce advisory fees but can also be confusing and hard to understand.
- Gives you sole fiduciary responsibilities.
- May not offer you the reporting or performance metrics you need.
- Might involve potential conflicts of interest.
- Lacks consistent oversight as a result of limited board terms.
- Lacks a plan for addressing underperforming funds.
- Requires extensive expertise, time, and interest to take on creating and rebalancing the portfolio.
Money Markets and Deposit Accounts
While money markets accounts and deposit accounts are considered a relatively safe form of investment, the returns they generate are so low that your funds may be actively losing value due to inflation. When considering money market and deposit accounts, remember that these funds:
- Are considered extremely low-risk on the investment spectrum because they are FDIC insured.
- Offer high liquidity.
- Require minimum balances with your bank.
- Generate some income, but little capital appreciation.
- Are not suitable as long-term investments.
- Have an average annual return of .07%. (The inflation rate in 2022 is 8.5%.)
- Will likely lose value due to inflation in a money market or deposit account.
Automated investing, or robo-advising, is a class of financial advisers that leverage modern financial technology to automate your investment strategy with diversified portfolios of stocks and bonds. Based on passive investing theories and mathematical rules or algorithms, this technology has been around for a decade, with a market size of $1.79 trillion as of 2022.
Today, Infinite Giving is the only automated investing platform for entity investing and the first one built specifically for nonprofits. Passively managed automated investing platforms:
- Aim to build wealth gradually over time and mirror the market.
- Are low cost and save you money.
- Have easy tools to create endowments and grow other asset giving
- Use full digital account opening and management.
- Offer automated quarterly board reports.
- Can provide returns greater than 90+% of active investment advisors.
- Reduce risk through diversified portfolios of ETFs and index funds created specifically for nonprofits.
- Bring high transparency and easy access to funds.
- Have a low minimum requirements.
- Offer a simple to use platform that brings all organization investment strategies in one place.
- Utilize passive management for capital preservation.
Don’t rush into choosing an investment management provider. Take some time to ask questions and explore your options.
Ready for the next step? Once you’ve decided on your investment account solution, you’ll then open your investment account.
Step 3: Opening a Nonprofit Investment Account
In order to open a nonprofit investment account, you’ll need the following documents to prove your nonprofit status:
- An account application (with basic nonprofit information)
- A copy of your Articles of Incorporation
- A copy of your 501(c)(3) IRS Determination Letter
Gather these documents ahead of time, so that you can get up and running quickly. Depending on the method you use, the application process can be completed in minutes or take weeks.
Step 4: Boost Fundraising Capabilities
Once you have access to your account, the next step is to fund it with your cash reserves and leverage the account to raise additional funds. Having an investment account can allow your nonprofit to accept and manage new types of donations easily.
In fact, nonprofits that can accept non-cash assets can appeal to untapped donor audiences and grow up to six times faster than their counterparts. Non-cash assets you should consider accepting include:
To accept these types of non-traditional donations, include the following nonprofit investment account details in any donation instructions you share:
- Custodian of Account
- Custodian DTC Clearing Number
- Account Name
- Account Number
Moreover, when deciding on your investment management solution, look for tools that make it easy for you to accept these donations and for donors to initiate a transfer.
What Should a Nonprofit Invest In? Value Alignment Investing Strategies
Contrary to popular belief, there isn’t a single right way to invest your nonprofit’s money. Nonprofits can invest according to a range of strategies. Only you can determine which one is the right approach for your nonprofit.
In most cases, you want a strategy that protects the value of, grows, and allows you to access your assets. However, for those committed to a focused mission, you’ll likely also want a strategy that considers additional factors about where you invest your funds.
Let’s walk through the process of evaluating different nonprofit investment strategies and why they may be a good fit for your nonprofit. These include:
- Environment, Social, and Governance (ESG) Investing. This takes a step beyond value-alignment to actively search out companies that align with the core ethics of environmental, social, and governance criteria. Environmental investing considers a company’s conservation practices, carbon footprint, pollution, and use of renewable energy. Social investing considers how a company treats its employees and customers, workforce diversity, labor conditions, and community involvement. Governance investing considers how a company is run, its shareholder treatment, the diversity of its board, the transparency in its accounting, and its political influence.
- Thematic Investing. This investing strategy allows investors to focus their investments on a specific theme or industry, such as faith-based organizations or companies with women in leadership. For example, a nonprofit committed to environmental justice might thematically invest in companies in the renewable energy industry.
- Impact Investing. This strategy focuses not on financial return but on making the largest measurable social or environmental impact. Generally, these investments are not available in the public market and are relatively illiquid.
Luckily you don’t have to choose between sacrificing your values and growing your funds. A 2020 report from Morgan Stanley found that sustainable fund portfolios outperformed traditional funds.
No matter where you choose to invest your money, remember to consider your timeline, your other sources of revenue, and your risk tolerance. Generally, a longer timeline (e.g., investing for long-term savings) and more consistent cash flow (from recurring unrestricted gifts and grants) can open up additional investment for longer-term, higher risk, and less liquid opportunities.
What to Look for in Your Nonprofit Investment Management Tools
In addition to being able to accept nontraditional donations such as stocks, endowments, and crypto, your nonprofit investment management provider should offer a range of tools and solutions that make investing easy and effective. Look for the following in your provider:
- Low Fees. Researchers at MIT linked high nonprofit investment account advisory fees to lower returns. The study found a .17% decline in net returns for every one percent increase in fees. For best results, choose an investment manager with low, transparent fees.
- Access. Your provider should allow you to access your account at any time and quickly and easily withdraw funds.
- Security. To protect your money, your provider should be insured by the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC). Moreover, its technological products should offer security features such as two-factor authentication and data backup and encryption.
- Investment Options. Your provider should offer a selection of portfolios that can align with your mission, values, and investment goals.
- Trusted Advising Services. You shouldn’t have to invest alone. Get expert advice from a Registered Investment Advisor whenever you need it.
- Ease-of-Use. Ultimately, investing doesn't have to be a time-consuming and difficult activity. With the right tools, it can be as easy as funding an account, setting your goals, and choosing a portfolio. Then, you can concentrate your days on achieving your nonprofit’s mission.
Ultimately, it doesn’t matter if you’re a big nonprofit looking to improve your investing strategy or a small one just beginning your investment journey. You deserve an investment solution made for your nonprofit by nonprofit industry experts.
Want to learn more about investing for your nonprofit? Explore the following tools and resources:
- Free Tools and Resources for Nonprofits. Most investment resources are hidden behind expensive paywalls. In order to democratize nonprofit investing, we’ve compiled a list of free critical investing tools for your nonprofit.
- Case Study: The Do Good School. This case study shows how the Do Good School could use passive investing to outpace inflation with an average annual return of 8.29% per year.
- Nonprofit Reserve Funds: A Primer. Interested in sustainable nonprofit development? Learn more about why and how your nonprofit should prioritize growing your reserves.