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. Once you raise funds, you now have to manage them as a part of good stewardship. Nonprofit investing is just as important (if not more so) as the fundraising practice itself. And it doesn't have to be high risk, but an intentional focus on stewarding what you have and making the most of each donation. Alongside other fundraising activities, a well-managed investment account can help nonprofits fund specific projects and reach long-term financial sustainability.
This guide will look at the basics of nonprofit cash management and 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, partner, 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, particularly for small to mid sized organizations. High minimums and high advisory fees are often a deterrent. And while DIY is affordable, most organizations know best practices require an outside partner to take on a consistent fiduciary role.
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. In fact, as a part of good financial stewardship, you likely should have one. And as a 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.
Investment accounts can be used for low risk, high liquid strategies such as Treasury Bills and money market mutual funds in addition to more growth, endowment oriented accounts that include Index Funds and Bonds. Brokerage accounts are also used to receive stock donations which can help grow your high capacity giving. Every nonprofit should have a brokerage account.
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 more conservative, highly liquid strategies like Treasury Bills, CDs, and money market mutual funds.
However, to avoid violating U.S. Securities and Exchange Commission (SEC) regulations, your investments should not benefit your nonprofit’s employees or board members. Note: this means board members should not be managing your funds or benefiting from them in any way. It's best to avoid any potential conflict of interest and find a third party who can support you as a fiduciary in your organizational goals. This also helps remove politics and brings in nonprofit expertise and guidance.
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.
Can Nonprofits Buy Treasury Bills?
For a low-risk investment choice or in addition to investing in stocks, nonprofits can buy treasury bills or treasury bonds. These are some of the lowest-risk investments you can make because they’re fully backed by the US government if held to maturity. Treasury bills are rising in popularity for nonprofit reserves due to raising yield rates that are highly liquid and often bring greater returns than money markets and savings.
A Nonprofit Investment Advisor can buy a treasury bill at a set price, then let it mature at a fixed rate of interest over the course of a few months (or years if you buy a treasury bond). Typically these are rolling portfolios that are automatically repurchased at the end of each yield. At the end of the maturity period or whenever you withdraw the funds, your nonprofit gets paid for the face value of the bill at that time.
If needed, Investment Advisors can also sell treasury bills for you on secondary markets in between yields. This way, the funds remain highly liquid, and you can typically access the cash in 3 business days. Treasuries are currently a popular opportunity for more risk averse organizations who still want targeted growth.
How do you Choose an Investment Advisor?
You (hopefully) wouldn’t hand your wallet over to just anyone. You need 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.
We also recommend finding an Investment Advisor who works exclusively with nonprofits. Your needs as a NPO vary greatly from personal or for profit investment strategies so having an expert who can speak into industry standards and best practices, and make recommendation on policies and procedures as well as investment strategies is incredibly valuable.
How Much Money Does a Typical Nonprofit Have to Invest?
There’s no standard amount of funds a nonprofit has to invest, as this depends on individual financial situations and investment goals.
Ideally, experts recommend keeping 6 to 12 months’ worth of your organization’s operating costs in reserve—and as we mentioned earlier, it’s worth investing your reserve funds to avoid them losing value in a savings account. However, this isn’t a reality for many nonprofits, and anything is better than nothing. As you gain more financial sustainability, you can aim to invest 12 months to two years’ worth of operating costs.
You may need to set aside a certain amount of funding in order to open a brokerage or investment account. This amount can vary depending on the brokerage firm or investment solution, so be sure to research any requirements ahead of time to prepare.
Benefits and Importance of Nonprofit Investing
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 cash reserves in a simple savings account, these funds are likely to not be FDIC insured and actively losing value.
More nonprofits need to move from a scarcity mindset to an abundance mindset to truly build a sustainable organization. Thoughtful financial strategies are just as important for smaller organizations as they are for bigger ones, yet are often overlooked. It benefits your current giving as well as your future opportunities because donors (especially major gift ones) want to know you are thinking for long term for impact.
For many nonprofits, the prospect of their hard-earned funds not being FDIC insured or decreasing in value due to low yields over time is enough of a reason to build a conservative investment portfolio of some kind. What emotionally feels "safe," is often detrimental to your growth and impact when stepping back and reviewing the data. Always use data when making financial decisions, not just emotions. It's difficult, but a good rule of thumb. That will help your organization get more specific on exactly what you hope to achieve from your financial stewardship—maybe even 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:
- Cash Reserve Funds: Best practices tell nonprofits that the first step to achieving financial sustainability as an organization is saving 6-12 months of operational reserves. This serves as your emergency fund if a grant is lost, a pandemic happens, war, or other situations our of your control that can impact funding. 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 with unused reserve funds. High liquidity, low risk, and greatest returns should guide these decisions. A good Nonprofit Investment Advisor can help you shop best rates in money market mutual funds, Treasury Bills/Bonds, and even CDs.
- 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. A healthy reserve fund invested wisely—especially one that readily accepts endowment and stock donations—can encourage those large gifts by showing your nonprofit’s strategic and thoughtful plan to use their donation for many years to come.
- Building Assets. Especially if you don’t own much capital, funding a conservative investment portfolio can also bolster your balance sheet and give your nonprofit more legitimacy while increasing your buying power and impact.
Ultimately, your investment goals will depend on various factors, including your timeline, current assets, and regular fundraising behavior. They should also be guided by a sound Investment Policy Statement (IPS). A good Nonprofit Investment Advisor should be able to help you craft this at no cost. Plan to address these factors in routine conversations with key stakeholders, your board of directors, and your Nonprofit Investment Advisor.
How to Get Started: 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. It should be a simple, easy to understand document that can be passed to new board members as legacy members roll off. You also should not need to pay an attorney to create these documents. A good Nonprofit Investment Advisor can help you work through one at no cost, and templates can also be found online to rework and edit as needed. An IPS provides both your Investment Advisor and your team and board the guardrails for financial stewardship for the organization.
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, download our 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: Decide 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 and a new wave of modern Investment Advisors have led to an increase in access to sound investment strategies for small to mid-size nonprofits for reduced fees.
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:
- Don't typically have nonprofit expertise.
- Don't typically offer the best rates available
- Require high minimums and have high fees to cover their overhead.
- Often have high minimums and aren't open to smaller nonprofit investments (under $10M)
- Are a traditional industry that requires extensive paperwork.
- Require long timelines to get things done.
- Have a middle man between you and your money.
- Can make fund transparency and access difficult.
Active Wealth Advisors
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. In today's market that number is closer to 95%. 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.
While you are able to invest directly through Fidelity or Schwab, it's not considered a best practice for several crucial reasons. The clear positive is it cuts down on fees, but it also comes with great fiduciary responsibilities for nonprofits. Volunteer board members who do this often have the best of intentions, but they are just that - volunteers. There is an obvious lack of oversight, accountability, and transparency in DIY investing. There's also typically a loss of consistency when board member terms are up or two professional have differing opinions. It also opens up your organization to great scrutiny from donors, and political and relational fall out if mistakes are made. 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 Savings Accounts
While money markets accounts and savings accounts are often 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. Funds that are held in money markets and savings also run into FDIC insurance limits of $250k. Bank failures do happen, and you want to limit your risk of holding over $250k per bank outside of your typical operating budget. The easiest way to lower your banking risk is to diversify into a brokerage account, or ensure you are a part of a banking sweep program that increased your FDIC limits. When considering money market and savings accounts, remember that these funds:
- Are typically not FDIC insured beyond $250k.
- Offer high liquidity.
- Often 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.
Nonprofit Investment Advisors
Nonprofit Investment Advisors take on fiduciary responsibilities and partner with nonprofit organizations and their boards as an outsourced Chief Investment Officer (CIO). Their deep understanding of nonprofit unique needs and governing policies has helped them to create award winning experiences for nonprofits.
Due to nonprofit's reduced capacity for risk, Nonprofit Investment Advisors provide a variety of portfolios from mutual funds, CDs, and Treasury Bills, to securities and bonds. They also often leverage Index Investing which leverages modern portfolio theory to bring you the greatest returns at possible within the risk category you are most comfortable with. Based on passive investing theories and mathematical rules or algorithms, this approach and the technology of more passive investing has been around for a decade, with a market size of $1.79 trillion as of 2022.
Today, Infinite Giving is one of the only firms created specifically to serve small to midsize nonprofits. They leverage technology to reduce their overhead and bring nonprofits a modern investing and giving experience. Nonprofit Investment Advisors should:
- Provide consistent fiduciary oversight
- Aim to build wealth gradually over time and mirror the market.
- Have reduced and transparent fees.
- Have easy tools to grow your asset giving.
- Offer quarterly board reports.
- Can provide returns greater than 90+% of active investment advisors.
- 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: Open 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.
Using 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, DAF grants, 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 Nonprofit Advising Services. You shouldn’t have to invest alone. Get expert advice from a Registered Investment Advisor with years of nonprofit expertise whenever you need it.
- Ease-of-Use. Ultimately, investing doesn't have to be a time-consuming and difficult activity. With the right tools and partner, 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:
- Managing Nonprofit Reserve Funds: The Ultimate Guide. Interested in sustainable nonprofit development? Learn more about why and how your nonprofit should prioritize growing your reserves.
- How to Accept Stock Donations: The Ultimate Guide. Learn how to accept stock donations from your supporters to boost your fundraising capabilities and meet high-capacity donors where they are.
- 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.