By Nicole Bailey

Investment products are more accessible than ever, giving community associations a wide range of investment options. With that accessibility comes greater responsibility to ensure association funds are managed prudently and protected from unnecessary risk. Community managers and boards of directors have a fiduciary duty to preserve funds needed for future repairs and replacement of major association assets. Just as associations rely on attorneys or tax professionals, they should also work with a licensed investment advisor to manage reserve investments. A professional advisor can help ensure investments comply with governing documents, maintain liquidity for upcoming expenses, and earn a competitive rate of return. Associations should prioritize safety, liquidity, and yield—in that order.

SAFETY

As communities age, reserve funding becomes a growing concern, and associations face the financial consequences of being underfunded. Many states have introduced legislation governing reserve management. In Colorado, Senate Bill 100, passed in 2005, requires associations to adopt an investment policy. Like the other governance policies required by the law, the investment policy should be prepared with guidance from the association’s attorney. 

A formal investment policy provides consistency as board members, priorities, and market conditions change over time. The policy typically outlines the association’s investment objectives, acceptable investment vehicles, and management requirements. In most cases, the primary objective is preservation of principal. This generally limits investments to vehicles insured by the FDIC or backed by the full faith and credit of the United States government.

Common examples include certificates of deposit (CDs), treasury bills, government-backed money markets, and other federal securities. These investment options reduce credit risk and help protect association funds from market volatility and economic uncertainty. While all investments carry some degree of risk, restricting investments to federally insured or government-backed vehicles can significantly reduce exposure.

LIQUIDITY

Balancing available cash with anticipated expenses is one of the most important aspects of reserve fund management. Reserve funds are intended for the repair and replacement of association assets, so the board, management team, and investment advisor must ensure funds are available when needed.

A professional investment advisor can use the reserve study to build a customized investment strategy that aligns cash availability with projected expenses. This allows associations to maintain sufficient liquidity while still earning interest on funds that are not immediately needed. If too much cash remains idle in low-interest accounts, the association may lose potential earnings opportunities. Money market accounts can provide liquidity while generating interest income, though rates may fluctuate as market interest rates change. CDs offer a different advantage by locking in a fixed interest rate for a specific term. Working with a licensed investment advisor allows boards and managers to find the appropriate balance between accessibility and long-term growth.

YIELD

An association’s investment returns are heavily influenced by broader interest rate trends, particularly movements in the 10-year U.S. Treasury note. Interest rates fluctuate in response to economic reports, inflation, geopolitical conditions, and financial markets. These movements affect CD rates, money market yields, mortgage rates, and other lending and savings products.

Higher interest rate environments can create an impactful opportunity for community associations to strengthen reserve funds without taking on additional investment risk. For associations with larger reserve balances, these additional earnings can help to offset the impact of inflation, reduce funding shortfalls, and lessen the likelihood of special assessments or loans. 

The Federal Open Market Committee (FOMC) also plays a major role in shaping interest rates. When inflation is elevated, the FOMC may raise rates to slow economic activity. Conversely, rates may be lowered during periods of economic weakness. Because interest rates are constantly changing, associations benefit from working with professionals who actively monitor market conditions.

A licensed investment advisor can help determine the most appropriate investment strategy based on both current market conditions and the association’s liquidity needs. In some environments, maintaining a disciplined CD ladder may be the best approach. In rising rate environments, shorter maturities may provide more flexibility to capture higher future yields. In declining rate environments, longer maturities may help lock in stronger returns before rates fall further.

Ultimately, maximizing yield is not simply about finding the highest available interest rate. It is about selecting investments strategically to balance safety, liquidity, and market conditions while supporting the association’s long-term financial goals.

Community associations have a responsibility to current and future owners to protect and preserve association assets. By focusing on low-risk investments, maintaining appropriate liquidity, generating interest income, and working with qualified investment professionals, associations can strengthen reserve funds and fulfill their financial obligations to the community.

The information contained herein has been derived from sources believed to be reliable, but no representation or warranty, express or implied, is made by RBC Wealth Management, its affiliates, or any other person as to its accuracy, completeness, or correctness. All opinions and estimates constitute the author’s judgment as of the date of this publication, are subject to change without notice and are provided in good faith but without legal responsibility. 

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Nicole Bailey is a Certified Financial Planner ™ and financial advisor serving community associations nationwide, focused on helping clients protect, preserve, and grow their assets.