ISSUES AND NEWS FOR CHARITIES AND NON-PROFIT ORGANIZATIONS

The boards of charities and nonprofit organizations are under an obligation to structure policies and procedures in keeping with best practices. Many boards seek to lead by example in all endeavors, particularly in their investment activities.

The boards of nonprofit organizations tend to come from a wide range of backgrounds, often with little investment expertise. Even where boards to have investment expertise, it is incumbent on the board to organize activities as to minimize conflicts of interest and provide prudent direction to the organization. In fact, under current prudent man legislation, directors with greater investment knowledge will be held to a higher standard than other members of the board. It is critical for those knowledgeable directors that the affairs of the organization be governed to the highest standards.

Statement of Investment Policies and Procedures

Boards typically select the most experienced members from fields related to finance to sit with the Executive Director and Chief Financial Officer on a formal investment committee. Once established, the investment committee will want to examine the short- and long-term needs of the organization with respect to the sources of funding to determine an appropriate statement of investment policies and procedures (SIPP). The SIPP should specify the guidelines for the management of the funds in terms of the types of suitable investments and the quality of certain instruments, the proportions of the fund to be allocated to different investment types and the benchmarks against which progress will be measured over time.

Beyond this point, it is doubtful that the board or management would find it appropriate to get involved in actual security selection.

Investment Management

Boards usually select an appropriate investment manager to carry out the investment policy. Consumers generally have three options at this point: Investment Advisors (Retail Brokers), Certified Financial Planners and Investment Counselors.

Investment Advisors and Certified Financial Planners are regulated under the Investment Dealers Association. They are deemed to have an agency relationship with their clients and tend to make their living through commissions for selling or trading investment product or trailer fees from products previously sold. Many Brokers or Chartered Financial planners sell mutual funds or managed product, often called WRAP's that are subcontracted to other investment professionals who carry out the transactions. Brokers may sell individual securities and in some cases, where they have passed the Partners and Directors exam with special registration, take on discretionary accounts.

Investment Counselors are registered by the Ontario Securities Commission (OSC) and must typically have the Chartered Financial Analyst (CFA) designation, the highest standard in the industry. Investment Counselors are deemed to be in a fiduciary relationship with the client - meaning the clients' interests must come ahead of their own. The only fee an Investment Counselor earns is the fee paid by the client. Counselors are not permitted to be in a conflict of interest position between their clients' interest and fees earned from selling or trading product.

Investment Counselors never have direct access to the funds in client accounts. Instead arrangements are made with a third-party insured custodian to hold the funds. The Investment Counselor has authorization from the client only to trade the securities and arrange for settlement with the custodian.

Common investment management expenses are 2.5% to 3% in mutual funds, 2.75% to 3.5% in WRAPs and 1.25% or less at Investment Counselors. However, Investment Counselors typically require larger pools of capital to manage, with minimums ranging from $500,000 to $5 million.

If the Board decides to select an Investment Counselor, a decision must be made as to whether segregated or pooled management is appropriate.

Pooled funds lump clients with common interests and objectives together and look much like mutual funds except for the lower management fee and higher capital entry level. Balanced pools (mixing cash, fixed income and equities) are available but tend to use common benchmarks. For example, many fixed income components of balanced polls may use the Universe Bond Index as a benchmark. Where clients have more immediate spending needs, say within five years, this index may not be appropriate, as a shorter-term index should be used. Where a high degree of customization is desirable, segregated funds where the client owns the actual securities (as opposed to units in a pool) offer a greater degree of precise tailoring to the clients needs. Many Investment Counselors may have low minimum capital requirements but put clients below multi-million dollar thresholds into pooled funds.