Investment Advice… For you, your money & your Association…
Or do you prefer the Hot tip of the week?
How can you instill financial confidence for you and your community? The term financial confidence means different things to different people. To the small business owner, it may be just enough cash to cover the weekly payroll, taxes, or insurance. To the retired couple on a fixed income, it may be the knowledge that their IRA or pension plan is invested in government-guaranteed or insured vehicles. To the young executive, it may be a hot tip on the next dot.com stock that will purportedly double in the next few days.
Most community associations I have worked with over the last 40 years have relatively loose, if any, requirements when you talk about the reserve and operating account investments. Some CC&Rs (Covenants, Conditions, and Restrictions) are more specific and require that the board either 1) deposit funds in a financial institution whose deposits are insured by a federal agency, or 2) place funds into a bank or savings account or 3) invest in obligations of the U.S. Government. However, in most associations, I find the former, versus the latter, is usually the case.
Without specific CC&R restrictions or a formal investment policy statement (IPS), most investment advice or specific recommendations related to reserve and operating fund investing has come from Association Management Companies or occasionally, interested board members. Financial confidence means something different to each of us, we all have a different vantage point of our respective risk/reward tolerance as it relates to our finances. Therefore, advice to the board is usually varied and may in some cases be detrimental.
The advice from professional community managers usually takes the form of an updated list of local CD rates or U.S. Treasury yields and the caveat that no single investment should exceed the FDIC limit of $250,000. In addition, there may be some input from others regarding alternative investments that could potentially offer much higher returns, however, more risk than the usual CDs or Federally Insured vehicles.
Most managers facilitate the investment of these funds on behalf of their clients and the accompanying work that is part of the investment process. This opens the door to many questions and some possible problems.
Over the last 25 years, many board members I know, have initially looked to their professional management representatives for advice on how to invest funds for their associations. In 2022, the new millennium and era of litigation, managers need to be extremely careful, however, not to offer any type of investment advice. Professional Investment and Financial Advisors are licensed and regulated by the Securities and Exchange Commission (SEC), various State Securities regulators and FINRA. The Investment Advisors act of 1940 requires that firms or sole practitioners compensated for advising others about securities investments, must register with the SEC and conform to regulations designed to protect investors.
Managing agents or Property managers who do not want to subject themselves to the testing, licensure, examination or record keeping requirements imposed by the SEC and FINRA must be very careful not to dispense advice on regulated activities. From a technical standpoint, even the act of providing rate quotations and information regarding investment options may be construed as a violation of certain regulatory statutes.
In the last few years, the lines of separation in the financial services industry have blurred and you may have noticed some of the local banks offering mutual funds in addition to CDs, checking accounts and other conventional banking services. In addition, some “bankers” have now become Financial Advisors by going through the rigorous tests and requirements necessary to provide investment advice and products to their clients. Keep in mind that these products are not offered by the bank itself. Usually, the bank will have a subsidiary that fits the regulatory requirements mandated by the SEC and the FINRA and this “securities” arm of the bank may provide some investment advice and products usually associated with non-traditional banking.
One extremely important item to consider whether you invest association funds on your own, or with a bank trust company is the creation of a formal “Investment Policy Statement” (IPS). This is vital for the protection of the association, board members and the assets of your community. The investment policy statement will provide the framework and specific details regarding the risk parameters, investment vehicles, maturities, asset allocations and many other important points that many associations do not even consider. It will also provide continuity from regime to regime, regarding what and how your association should invest in over time.
Association boards are usually composed of 5, 7 or even 9 members, which tends to create many differing viewpoints on what investment protocols to utilize. Many boards have individuals who have done quite well with their own investment portfolios; however, they may not be completely familiar with fiduciary responsibilities, State Statutes or even their own CC&Rs. On the other hand there may also be members with absolutely no experience and no desire to become involved or exposed to the potential liabilities. In these instances, the investment of funds for the association usually falls back to the managing agent.
Therefore, it is important to utilize experts in Financial Services who work primarily with Home Owners Associations and who possess a long-term track record of working with communities like yours. With the added levels of experience, continuity and professional advice, the board can feel financially confident and the relationship can be enhanced and maintained over time.
Finally, remember that in addition to investment advice, a professional Financial Advisor can also provide some other important benefits. Potential Tax savings, Cash Flow efficiencies, consolidated monthly analysis and an annual review of the fiscal health and well-being of your association. This analysis, along with a review of the reserve study, balance sheet, budget and current financials for the association can help you provide value added and maybe even a few dollars more to your association.
Helping You Build a Firm Financial Foundation For You Future
Nico F. March is the Managing Director for The March Group, LLC. He has worked with Community Associations since 1974 and has served on several Boards, including the Board of Directors for the Community Association Institute (CAI), San Diego Chapter. His team has specialized in Corporate Cash and Association Financial Management since 1982 and has assisted over 1000 Associations, Nonprofits and Timeshares invest over $4 Billion in reserve, operating and reconstruction funds. Nico and his team work out of their San Diego and Wyoming offices and may be reached at 888.811.6501 or email [email protected] for further information and consultations.
The March Group is not a tax or legal advisor. We will be glad to work with your professional CPA and Attorney to help you with your financial goals. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. Securities offered through LPL Financial, Member FINRA/SIPC.