It should come as no surprise that, according to the ASAE Research Foundation’s latest Association Impact Survey (February-March 2021), “Association leaders’ top challenges in 2021 continue to be related to managing the financial aspects of their organizations resulting from the impact of COVID-19.”
Associations are becoming more innovative as leaders explore new sources of revenue, evaluate the future of meetings and adapt to the changing way members consume content and professional education. The financial implications of these changes can be significant, making this the ideal time to review investment and reserves policies to make sure they still align with the goals of the association.
There are several key considerations that go into the development of these policies. For guidance, I turned to Dennis Gogarty, CFP, AIF, President, and Mark Murphy, CFA, Chief Investment Officer, at Raffa Investment Advisers (RIA), a Washington, DC-based firm that specializes in investment advisory services to associations. Deciding to invest an association’s reserves must go beyond simple formulas to determine amounts and instead be driven by policy and goals, while respecting the values of the organization and the members it serves.
When is the time for the Board of Directors to begin allocating investment funds and taking that step to set up an investment account?
Dennis: In my experience, it is worth setting up an investment account when there is clarity that the association has roughly $250,000 – $500,000 in cash that they are not going to spend within the next two to three years.
Mark: I agree and would also add that I typically recommend that associations consider setting aside dollars in an investment reserve immediately, even if the organization doesn’t currently have money to save. Creating an investment program involves more than investing dollars or setting up an account. There are investment and reserve policies that can be created and ratified well beforehand that will bring structure and discipline to your organization’s investment plan.
Dennis: The budgeting and planning process should start immediately. We recommend all associations have some sort of investment reserve, whether it is excess cash on hand in a savings account to fund current operations or a longer-term rainy-day investment fund. Look to open an investment account and start to invest once you have that roughly $250,000 – $500,000 that you aren’t using for a couple years.
What factors should the Board take into consideration when investing the association’s money?
Mark: The Board of Directors should create, develop and ratify an investment policy statement (IPS) to set forth the guidelines and restrictions for investing the association’s dollars set aside in reserve. There are a couple of important components we recommend including in every association’s IPS:
- Defining an overall portfolio objective and time horizon
- A specific target asset allocation and neutral policy benchmark
- Rebalancing Guidelines
- Roles & Responsibilities of Staff, Volunteers, and Investment Advisers
- Permitted/Prohibited Investments
- Decision Making Authority (discretionary vs. non-discretionary)
- Reporting requirements
Dennis: I’d also recommend that the Board of Directors take into account any conflicts of interests when thinking about how to invest the association’s money. For example, a healthcare association may want to restrict investments in tobacco stocks or other companies whose businesses run counter to the association’s values. We’re seeing a more noticeable preference for organizations to look to align their investments with their values.
What advice do you have for the Board when it comes to risk tolerance?
Mark: We approach defining risk tolerance in two separate but equally important ways. The first being the ability of the organization to take on risk and the second being the willingness of the Board of Directors to endure risk (or more specifically, market volatility). The ability of the organization to take on risk will revolve around understanding the association’s financial condition by looking at budgets, cash flow projections, strategic planning documents and audited financial reports. We highly recommend associations couple that information with a high-level risk tolerance survey of the Board of Directors to gauge how comfortable they are with taking on investment risk.
Dennis: The importance of this side of the equation becomes incredibly important during periods of market volatility like we experienced just last year. We can’t overstate the importance of remaining disciplined to your investment strategy. If stocks decline in value like they did back in March of 2020, down 30%+, and that causes your Board to change their investment strategy by selling out of stocks, it’s likely that your risk tolerance wasn’t fully represented in your investments.
Mark: Another critical component of defining risk tolerance is identifying what the money is being used for and when you are looking to spend those dollars. For example, setting aside dollars to fund a project in three years means that those dollars should be invested very conservatively, since you know you’ll need them available in the short term.
When should the Board dip into the association’s invested reserves? What should be considered before doing so?
Mark: Hopefully, because you’ve set aside dollars for a specific need and have planned to withdraw funds in order to cover that unbudgeted expense!
Dennis: Otherwise, an association should tap into reserves to supplement revenue when there’s a shortfall (but only if you can’t immediately cut costs to offset that revenue shortfall). In a perfect world, withdrawing from long-term reserves should only arise because you’re not willing or able to cut expenses in order to sustain member value.
Mark: I’d also want the association to consider if this is a temporary or longer-term issue that is driving you to dip into reserves. If it is a longer-term issue, you’ll need to cut expenses. If there’s an immediate opportunity for the organization to further member value or improve operations, but you aren’t able to budget for that, potentially look to dip into reserves.
What is the most common mistake that you see the Board make with its investment strategy?
Mark: From my experience, it is organizations that are too reactive to what the market is doing, instead of focusing on the time horizon of the portfolio. Investing is inherently risky, and there will be times when your portfolio has a negative return. Tuning out the noise from daily news and focusing on the long-term objectives of the portfolio have been proven to benefit investors over the long haul.
Dennis: I think from my perspective there are a couple common areas associations can improve in. The first is making sure you properly segment your overall investment reserves. Breaking out dollars needed by purpose and time horizon and then segmenting those dollars in a separate investment account. Having money set aside in a cash or operating reserve to be spent this fiscal year, a short-term reserve for dollars needed in the next 1-5 years and a rainy-day emergency or long-term reserve to cover unexpected revenue shortfalls or expenses 5-10 years out or more.
We also commonly see associations without robust investment policies in place. Mark touched on this earlier, but having well thought-out policies instills discipline in the investment process and removes emotion, both critical. Frequently, rebalancing policies and performance benchmarking are missing from investment policy statements.
Mark: Ensuring that associations are continually evaluating their investment programs is another common issue we often don’t see associations reviewing. The financial industry is constantly evolving – recently there’s been a lot of downward pressure on expenses within our industry, both on the fund fee and advisory fee sides. Confirming your fees are in line with the market is important.
Dennis P. Gogarty is the President of Raffa Investment Advisers. Dennis actively promotes the need for increased investment education and transparency. He is the founder of the Study on Nonprofit Investing (SONI), an annual study promoting access to information that allows nonprofits to benchmark their investment performance and policies with their peers.
Mark P. Murphy is Raffa Investment Adviser’s Chief Investment Officer. Mark has lectured on issues impacting nonprofit investing for the following organizations: the Greater Washington Society of CPAs, the American Society of Association Executives (ASAE), BoardSource, Association TRENDS, and the Finance and Administration Roundtable (FAR).