SONI Results – Investment Policy Guidelines

The Investment Policy is a key component in holding your investment adviser responsible for accurately executing the portfolio’s guidelines.

Maintaining and regularly reviewing your organization’s investment policy is an important step toward achieving your financial goals. During your review, clearly state the high-level goals and objectives of your investment reserves. Be sure to include governance procedures such as decision-making authority and discretionary/non-discretionary authorization.

As you review your policy, or if you are developing it for the first time, document the process by which various policy guidelines have been set. If your organization’s financial conditions or key personnel have materially changed, conduct a risk tolerance survey of key stakeholders. Anything you can do to bring discipline to the investment process is wise.

Rebalancing involves making decisions when markets are volatile. When stocks are down, for example, it’s human nature to believe they are “falling,” which assumes there is further to go. Without a clear policy to drive action, it’s likely investors will miss the opportunity to buy lower. Rebalancing presents an opportunity to take advantage of market volatility by systematically taking profits from market segment that have risen in value and using the proceeds to buy in to market segments that have fallen.

In our opinion, any rebalancing policy is better than not having one at all. Our preference, however, is a policy that allows a certain degree of drift from a target. While asset allocations should be monitored regularly, rebalancing is only necessary when a portfolio has moved too far from its target. Otherwise, the risk profile of the portfolio remains intact and incurring transaction costs is unnecessary.

We don’t believe it’s possible for anyone to consistently and reliable time markets. Absent some extraordinary ability to see the future, RWM strongly encourages nonprofits of all sizes to maintain clear asset allocation targets, consider the rebalancing strategy that works best for them, formally outline the rebalancing guidelines in their investment policy, and stick with it. Let investing be simple.

Does your adviser have discretion over your assets? If you don’t know whether you’ve granted discretionary authority to an adviser, you probably haven’t. In Fiduciary 360’s fiduciary handbook, Prudent Practices for Investment Stewards, five generally recognized provisions are cited that may reduce the liabilities associated with an investment steward’s management of portfolio assets. These are:

Use prudent experts (registered investment adviser, bank, or insurance company) to make the investment decisions.
Demonstrate that the prudent expert was selected by following a due diligence process.
Give the prudent expert discretion over assets.
Have prudent experts acknowledge their co-fiduciary status.
Monitor the activities of the prudent expert to ensure that the expert is performing the agreed upon tasks.

Generally, RWM recommends that nonprofits with less-than-highly investment-sophisticated boards grant decision-making authority to advisors pursuant to a process that meets these five provisions.