By Nicole Bailey, RBC Wealth Management
The board of directors of a community association is elected by its membership to make decisions based on the best interests of the association as a whole. In accordance with this responsibility, each director is designated as a fiduciary of the association and is thereby obligated to uphold his or her fiduciary duty. According to the Community Associations Institute, fiduciary duty means that board members are bound under state law to act within their authority, to exercise due care, and to act in good faith and with ordinary care that they believe to be in the best interests of the association.
To help them fulfill this fiduciary duty, boards consult with professional experts in their decision-making process. Doing so ensures the board has made a reasonable effort to act with the benefit of the entire community in mind. Any association can benefit from investing its funds, however the term and type of investment can vary based on the association’s investment objectives and projected expenses.
If the association has accumulated enough in its bank account to cover 30-60 days of expenses, it can benefit from potential interest earnings on additional funds until they are planned to be distributed. CD’s can have maturities ranging from 30 days to 30 years. Lastly, each dollar earned in investment income is one less dollar that needs to be assessed to the ownership.
Once the decision has been made to invest association funds, it can be difficult to know where to start. Partnering with a professional investment advisor can provide peace of mind that the investment selections are safe and meet the needs of the association’s long-term financial plan. In addition, with so many investment vehicles and strategies to choose from, an investment professional can provide focus and make suitable recommendations specific to the association’s circumstances.
While Colorado doesn’t have a statute outlining investment criteria for community associations, the Colorado Common Interest Ownership Act requires each association to adopt a policy concerning the investment of reserve funds. Investment guidelines provide for the types of investment vehicles appropriate for the association, liquidity requirements of these vehicles, asset allocations, responsibilities of the investment advisor, and an overall investment strategy. Consulting with the association’s attorney in reviewing or amending the policy is important to ensure the policy is in compliance with the association’s governing documents. A qualified financial advisor can also provide valuable input in drafting these policies.
Most association investment policies outline three parameters to be considered with investing funds. First, safety of principal is of utmost importance and no credit risk should be taken on with association funds. In declaring this, the policies often require investment selections be FDIC insured or guaranteed by the federal government. Second, the availability of funds should match anticipated expense schedules. Finally, once the first two criteria are satisfied, the association should seek the best rate of return possible on the funds. In addition to the components listed above, each association should be aware of inflation risk and potential loss of purchasing power. If inflation rates exceed portfolio returns, the association could face loss of purchasing power and should discuss this with their chosen financial advisor.
Once an investment policy is drafted and finalized, the board may consider appointing a finance committee to lead the search for an advisor. The board and/or committee can begin to meet with and interview qualified investment advisors. Similar to physicians, investment advisors tend to specialize in specific areas. In order to identify potential candidates with community association investment experience, the board should consult their local Community Associations Institute chapter for a member list.
Each investment firm can offer a variety of services and allocation models. To determine if the advisor and their firm are a good fit for the association, the board should conduct interviews with each of the candidates. Questions to consider asking when selecting an advisor are:
- What experience does the advisor have with community association funds?
- Who comprises the advisor’s client base?
- How does the advisor determine suitability of an investment vehicle for a community association?
- What are the advisor’s personal and professional qualifications to work with community association funds?
- What is the expected rate of return for a community association’s portfolio with consideration of the investment policy and the board’s expectations for liquidity?
- What type of communication can the board expect from the advisor?
In addition, requesting a list of references and consulting your management team in selecting an investment advisor is always beneficial to the association.
Once an advisor is selected and notified, the advisor will work with the board and management to open the account. Investment firms operate under many stringent compliance guidelines, which require detailed documentation be kept on each account. As part of the account setup, the association can expect to sign paperwork, as well as outline account operating procedures.
These procedures often include the following information:
- Who can authorize investments and distributions in the account?
- Where will statements and trade confirmations be sent?
- Who will have access to viewing the account online?
- How often will the advisor be in touch with the board?
As part of their fiduciary duty, boards are encouraged to work with community association partners. Partnering with a professional investment advisor can be extremely beneficial to an association. Establishing investment parameters can help to focus the investment playing field for the association and guide the relationship with the chosen advisor. The advisor should demonstrate proficiency in corporate cash management for community associations and understand and implement investment strategies that align with the association’s investment objectives. With a well-developed investment policy and a trusted advisor relationship, investment of association funds will benefit community associations.
Nicole brings a broad background in community management in the Atlanta and Denver areas to her role on the West Wealth Management team. She actively volunteers with the Rocky Mountain Chapter of Community Associations Institute on the Marketing and Membership Committee.
