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Investments by charities: Overcoming the barriers
By David Michaels
June 16, 2008
If it’s possible (and it is), for an organization to increase its revenue stream by investing while mitigating risk, then what stops so many charities from exploring alternatives to keeping their funds only in cash or near-cash equivalents such as T-bills and GICs?
This article looks at the investment issue from the perspective that barriers to investing are often self-imposed and based largely on fear and lack of knowledge.
What are the barriers?
Charities have a duty of care to a number of stakeholders: funders, donors, clients, and others. They are also under tremendous pressure to carry out their missions, often in a climate of funding freezes, cutbacks or increases that barely, if at all, match rising operating costs. The mere thought of adding “risk” to this equation is often the last thing that leaders of charitable organizations wish to consider.
The need to exercise a duty of care, combined with the requirements of the various Trustee Acts of the provinces, added to the risk issue, simply make investing too daunting a task for many charitable organizations.
Many charitable organizations do not have the level of expertise needed to give them confidence that they are making the right investment decisions. Senior management staff at smaller organizations are not likely to be experts in investment matters, and would rightly not feel qualified to exercise their fiduciary responsibility if they were investing funds in anything other than T-bills or GICs.
Even if the organization is fortunate enough to have a board member who has a good knowledge of investing, he/she might be unlikely to take on this responsibility, for fear of error.
Education is the place to start
Understanding the obligations of charities as outlined in your province’s Trustee Act is essential. In Ontario, for example, major changes were made to the Act in July, 1999 so that, “In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” (Trustee Act, RSO, 1990, Sec. 27 .1). And, “as a general rule, directors of charities are considered to be trustees of the assets of a charity, even though the charity itself is clearly trustee of those assets.” (Cowperthwaite Mehta Chartered Accountants website - with permission).
It is highly recommended that directors, CEOs and CFOs improve their level of knowledge, and that the board make this part of its learning and ongoing education. It may not be necessary to achieve a high level of expertise on the board, but education regarding the basics of investing, even knowing terminology, should be a goal of every nonprofit board. Educating the board can be done by having a guest speaker come in or attending seminars. Regardless of the approach, education about investing should be seen in the same light as making sure that there are at least some board members who are conversant with financial statements - it’s all part of best practices and due diligence.
Board composition
It may not be possible for very small boards to recruit members who have expertise in investing. Still, even small charities should consider investment knowledge as a criterion for board membership for at least one of its members. For medium to larger organizations, recruitment of one or more members who have some level of investment knowledge and or expertise should be mandatory. For organizations that sponsor any type of retirement benefit plan, a good level of investment knowledge on the board should be mandatory.
Smaller organizations that collaborate with other charitable organizations should consider opportunities to work with their community partners to share information and take advantage of expertise that may be present in their network.
Seek advice
As a fiduciary, receiving good advice on financial matters, investments or otherwise, is as important as getting good legal advice. Turning back to the Ontario Trustee Act, Sec. 27.5 states that in planning the investment of trust property, a trustee must consider, at least:

General economic conditions.
The possible effect of inflation or deflation.
The expected tax consequences of investment decisions or strategies.
The role that each investment or course of action plays within the overall trust portfolio.
The expected total return from income and the appreciation of capital.
Needs for liquidity, regularity of income and preservation or appreciation of capital.
An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

This may be a daunting task, especially for a small organization. But, Section 27 of that Act goes on to say that, “A trustee may obtain advice in relation to the investment of trust property,” and that there is no breach of trust in relying on advice if a “prudent investor would rely on the advice under comparable circumstances.”
Regardless of the type of professional that you seek advice from, keep in mind that technical knowledge alone may not be sufficient. Anyone giving advice should be sensitive to the unique circumstances of charitable organizations and be able to demonstrate that, at a minimum, he/she puts the mission of the organization above all else.
Charities are facing ever-increasing pressure to fulfill their missions, often with base funding that does not keep up with increasing costs. Additionally, charities are competing more and more among themselves for alternative sources of funding and donations. In this climate, maximizing returns from investment or potential investment assets not only makes good business sense, it is essential.
David Michaels is an Investment Advisor with BMO-Nesbitt Burns, Exchange Tower branch, in Toronto. Before joining Nesbitt-Burns, David was in charge of the finances of three legally separate but related medium-sized charitable organizations in Toronto where he used a cash management and fixed income strategy to significantly improve investment earnings.
David can be reached at (416) 365-6038, or via his website at www.davidmichaels.ca.
Opinions are those of the author and may not reflect those of BMO Nesbitt Burns. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is an indirect wholly-owned subsidiary of Bank of Montreal. Member CIPF. Click here to read the full disclaimer.