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Understanding and Updating Investment Policy Statements
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Understanding and Updating Investment Policy Statements

Written by:
,
Written by:
Written by:
Farther

A Guide for Nonprofits from Farther Institutional

Published:
June 15, 2026

‍Introduction

A well-structured Investment Policy Statement (IPS) is essential to responsible financial stewardship. For nonprofit organizations, the IPS serves as a blueprint for aligning investment practices with mission-related goals, ensuring accountability, and managing risk prudently. As financial markets evolve, donor expectations grow, and regulations shift, regularly revisiting and updating your IPS ensures long-term success and compliance.

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What Is an Investment Policy Statement?

An Investment Policy Statement is a formal document that:

  • Outlines the purpose of an organization's investments
  • Sets clear objectives and performance expectations
  • Establishes parameters for risk tolerance and asset allocation
  • Provides guidelines for spending, rebalancing, and manager selection
  • Documents responsibilities of those involved in investment decisions

It acts as a strategic guardrail for boards and investment committees, helping nonprofits remain mission-aligned while navigating volatile market conditions.

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Why IPS Updates Matter

While many nonprofits create an IPS at the inception of an endowment or investment account, failing to update it regularly can result in misalignment between portfolio performance, mission needs, and regulatory compliance.

Common Reasons for Updating an IPS

  • Major changes in organizational strategy or mission
  • Shifts in financial markets or macroeconomic conditions
  • New state or federal fiduciary guidelines (e.g., updates to UPMIFA interpretations)
  • Significant changes in donor demographics or gift composition
  • Portfolio underperformance or change in investment managers‍

According to the National Council of Nonprofits1, organizations should revisit their IPS annually or as circumstances dictate.

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Key Components of a Best-in-Class IPS

1. Statement of Purpose

Clarifies why the assets are being invested, including references to mission and any donor restrictions.

2. Roles and Responsibilities

Defines duties of the board, finance/investment committees, staff, and any outside advisors.

3. Investment Objectives

Establishes expected return targets, income needs, and time horizons.

4. Risk Tolerance

Includes metrics and qualitative descriptions of how much volatility and downside risk is acceptable.

5. Strategic Asset Allocation

Outlines percentage ranges for equities, fixed income, alternatives, and cash. Should reflect the long-term goals of the fund and ability to tolerate market swings.

6. Spending Policy

Establishes the method for determining annual distributions. Commonly used models include:

  • Fixed percentage (e.g., 4% of trailing 12-quarter average)
  • Hybrid models incorporating inflation adjustment
  • The 7 Percent Rule: While UPMIFA2 doesn't mandate a specific spending rate, it offers states the option to include a provision stating that spending exceeding 7% of the endowment's fair market value (averaged over three years) is presumptively imprudent.

UPMIFA provides considerable flexibility.  An institution may spend or accumulate as much as the board determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established. This is defined within the boundaries of donor intent defined in the gift agreement and the 7 percent rule. 

While the statute does not specify how frequently the board should revisit its spending decisions, a prudent board should consider adjusting its rate if the current level exceeds the presumption threshold and projected rates of return3. Regardless of the chosen policy, it must now be disclosed in the financial statement footnotes, increasing transparency for donors.

7. Rebalancing Guidelines

Provides thresholds for realigning the portfolio back to target weights, helping mitigate risk drift.

8. Performance Evaluation

Outlines benchmarks (e.g., 70% MSCI ACWI / 30% Bloomberg Agg) and how/when performance is reviewed.

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Governance Best Practices

  • Annual IPS Reviews: Even if no changes are made, review the IPS at least once per year.
  • Documentation: Keep thorough records of decisions and updates to maintain compliance and institutional memory.
  • Training: Ensure board and committee members understand the IPS and their fiduciary duties.
  • Integration with Other Policies: The IPS should reference or align with gift acceptance policies, conflict of interest disclosures, and endowment spending policies.

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Fiduciary Compliance and UPMIFA Alignment

Most states have adopted UPMIFA (Uniform Prudent Management of Institutional Funds Act), which requires prudent investment and spending based on a set of factors including:

  • The purpose and duration of the fund
  • General economic conditions
  • The role each investment plays in the portfolio
  • The organization's needs and resources

An IPS should clearly reflect UPMIFA-aligned considerations, ensuring investments and spending decisions are defendable and mission-aligned.

Fiduciary Trust International emphasizes that UPMIFA permits prudent spending from underwater endowments, allowing boards to act flexibly while maintaining documentation of their process. (source)

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Conclusion

An effective IPS is not a static document but a living guide that grows with your organization. At Farther, we help nonprofits design and revise IPS frameworks that reflect best practices, regulatory compliance, and your unique mission. Whether you're managing a multi-million-dollar endowment or building your first reserve fund, the IPS is your anchor in an increasingly complex investment landscape.

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About Farther

Farther is a modern wealth management firm helping nonprofits, individuals, and institutions manage and grow their capital responsibly. Our dedicated advisors partner with organizations to align investment strategy with mission, offering a full suite of endowment, reserve, and planned giving solutions.

For more information please visit our website at https://farther.com/institutions

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Sources & Additional Reading

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Important Disclosures

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This document is for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Farther Financial Advisors, LLC or any of its subsidiaries or related entities to participate in any of the transactions mentioned herein. All sources of information used are deemed reliable and accurate at the time of printing. Advisory services are provided by Farther Finance Advisors LLC, an SEC-registered investment advisor. Investing in securities involves risk, including the potential loss of principal. Before investing, consider your investment objectives, as well as Farther Finance Advisors LLC’s fees and expenses. Farther Finance Advisors, LLC does not provide tax or legal advice; please consult your tax and legal professionals for guidance on these matters.

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2) Chart Disclosures:
1. The targeted annual return of 8% is a forward-looking projection methodology, based on modeling of potential market scenarios and is not a guarantee of future performance.
2. This projection was not actually achieved by any portfolio and represents a hypothetical estimate of potential returns under specific assumptions listed."
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Updated as of May 20, 2026
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