By Jill Robisch, Director of Nonprofit Services, First Merchants Bank
Nonprofit leaders are entrusted with a significant responsibility: ensuring that the financial resources under their care remain available to advance the organization's mission, both today and for generations to come. Whether managing an endowment, reserve funds, donor-restricted assets, or long-term investments, organizations must balance current needs with future sustainability. One of the most effective tools for accomplishing this balance is a well-crafted Investment Policy Statement (IPS).
An Investment Policy Statement serves as the foundation for sound investment governance. More than a technical document, it reflects an organization's values, financial objectives, risk tolerance, and commitment to fiduciary stewardship. It provides guidance during periods of market uncertainty, helps maintain continuity through leadership transitions, and ensures investment decisions remain aligned with the organization's mission rather than short-term market sentiment.
Far too often, nonprofit boards devote significant attention to fundraising, programs, and annual budgeting while overlooking the importance of a formal investment framework. Without clear guidelines, organizations can find themselves making reactive decisions during periods of market volatility, relying on institutional memory rather than documented practices, or facing uncertainty when board members and staff transition. An Investment Policy Statement creates consistency and discipline, helping organizations navigate changing economic conditions while remaining focused on long-term objectives.
One of the most valuable aspects of an IPS is the clarity it brings to governance roles and responsibilities. While the board of directors maintains ultimate fiduciary responsibility for organizational assets, its primary role is strategic oversight rather than day-to-day investment management. The board establishes the organization's investment objectives, approves the policy, and ensures that assets are being managed in a manner consistent with both the mission and long-term financial goals. By focusing on governance rather than investment selection, board members are better positioned to fulfill their fiduciary obligations while leveraging the expertise of others.
Many nonprofits strengthen this oversight function through the creation of an investment committee. Acting as an extension of the board, the committee provides focused attention to investment-related matters and serves as a bridge between the board and external advisors. Regular reviews of portfolio performance, asset allocation, and policy compliance allow the committee to provide informed recommendations while ensuring appropriate accountability. Just as importantly, committee members help maintain continuity as board leadership changes over time.
External investment advisors play a critical role in translating policy into action. Their expertise helps organizations navigate increasingly complex financial markets while maintaining alignment with the objectives outlined in the IPS. Rather than making decisions based solely on current market conditions, advisors operate within the parameters established by the board, providing recommendations regarding portfolio construction, rebalancing, risk management, and performance evaluation. The strongest advisor relationships are collaborative partnerships grounded in a clear understanding of the organization's mission, spending requirements, and long-term goals.
Executive leadership and finance staff also play an essential role in the investment governance process. While they may not be responsible for investment selection, they often provide critical insight into the organization's cash flow needs, operational priorities, and upcoming strategic initiatives. Their ongoing communication with boards, committees, and advisors helps ensure that investment strategies remain aligned with organizational realities and evolving financial needs.
A strong Investment Policy Statement addresses several key areas that shape how an organization's assets are managed. At its core, the IPS should clearly articulate why the assets exist and what they are intended to accomplish. For some organizations, the primary objective may be preserving capital to protect donor investments. Others may prioritize long-term growth to expand future funding capacity or generate sustainable distributions that support ongoing operations and programming. Establishing these objectives creates a common understanding among all parties involved in investment oversight.
Equally important is defining the organization's tolerance for risk. Market fluctuations are inevitable, but organizations vary widely in their ability to withstand volatility. Factors such as operating reserves, dependence on investment income, anticipated spending needs, and organizational time horizon all influence an appropriate level of risk. A thoughtful IPS acknowledges these realities and helps decision-makers avoid emotionally driven investment changes during periods of market uncertainty.
The policy should also establish guidelines for asset allocation, which often has a greater influence on long-term investment outcomes than individual security selection. By defining target allocations among equities, fixed income, cash, and other asset classes, the IPS provides a framework that balances growth opportunities with risk management. These guidelines create discipline and reduce the temptation to shift strategies based solely on short-term market performance.
For organizations with endowments or quasi-endowment funds, investment governance extends beyond asset management to include spending decisions. A carefully coordinated spending policy helps ensure that current distributions do not jeopardize the long-term sustainability of the fund. By establishing clear methodologies for annual distributions, organizations can support today's mission needs while preserving purchasing power for future beneficiaries.
Perhaps most importantly, an Investment Policy Statement establishes how success will be measured. Effective performance evaluation focuses on progress toward stated objectives rather than short-term market comparisons. Clearly defined benchmarks and review periods help boards maintain perspective and evaluate results in a manner consistent with the organization's long-term strategy.
An IPS should not be viewed as a document that is written once and placed on a shelf. As organizations evolve, so too should their investment policies. Changes in leadership, financial condition, strategic priorities, or market environments may warrant periodic review and updates. An annual assessment provides an opportunity to confirm that the policy continues to reflect the organization's goals while addressing new opportunities and challenges.
At its heart, an Investment Policy Statement is about stewardship. It reflects an organization's commitment to managing resources with care, discipline, and intentionality. For nonprofit boards, it provides confidence that investment decisions are being made within a thoughtful framework designed to support both current impact and future sustainability. In an increasingly complex financial environment, a strong IPS remains one of the most important tools available to help nonprofit leaders fulfill their fiduciary responsibilities while keeping mission at the center of every decision.
As boards evaluate their governance practices, they may want to consider a simple question: If future leaders inherited our investment program tomorrow, would they have a clear roadmap to guide their decisions? A well-designed Investment Policy Statement ensures the answer is yes.
Effective investment governance requires ongoing education and awareness of changing market conditions. To help nonprofit leaders, board members, and investment committee members stay informed, First Merchants publishes a Weekly Investment Perspective highlighting market developments, economic insights, and timely commentary from our investment professionals.
For more information or to subscribe, visit Weekly Investment Perspective or contact your First Merchants relationship manager.
