In our recent HOA budget survey, 72% of board members indicated that they weren’t confident in the returns they were getting on their reserve funds and/or operating funds. To help, we’ve outlined six ways to get the most out of your reserve funds (including one you likely haven’t even heard of).

1. Only invest in money market accounts and CDs. 

Let’s get this out of the way. Your responsibility as a fiduciary is to protect the assets of your association. That means only investing in FDIC-insured money market accounts and CDs and avoiding risky investment vehicles like mutual funds, bonds and stocks. Even without intent to do harm, some boards choose risky investment vehicles, which can lead to consequences. For instance, if one of those investments falters, you may not have the necessary reserve funds to complete a planned maintenance project. 

Additionally, if a board member invests in a risky vehicle, there may be legal consequences. If reserves are invested improperly, a resident could sue the board for breaching their fiduciary duty and putting the funds of the community at risk. By solely investing in FDIC-insured money market accounts and CDs, you protect your association and community.

2. Trust HOA professionals for investment advice. 

Look to your community management company and financial services provider to help your board make sound investing decisions. Some boards research investment information themselves via the internet or financial publications, which is time that may be better spent creating better HOA policies. 

Karla Chung, vice president of FirstService Financial, FirstService Residential’s financial partner, said, “The problem we see is when board members take on too much themselves. They may perform hours of research, drive from bank to bank to scout out the best rates or compare their personal portfolio to that of the association without realizing that financial institutions treat consumer accounts differently than business accounts.” She added, “This can also lead to lower returns on investments because board members may not have the experience or extensive portfolio to leverage more competitive rates.”

3. Learn HOA investment fundamentals.

While board members should avoid overstepping their roles or taking on too many responsibilities when it comes to reserve fund investments, they should have a basic understanding of HOA financials. Along with understanding your responsibility as a fiduciary, it’s important to be informed about HOA investments and your financial obligations. Even if you are working with a financial services company, make sure your association is choosing safe and time-tested investments (e.g., money market accounts for liquid funds and CDs for long-term investments). Additionally, your association should also be following state legislation in terms of individual requirements for managing and reviewing reserve funds. 

4. Work with an HOA-specific financial services company. 

Even if you know the basics, you may not be an “HOA investment guru” when it comes to getting the most out of your reserve funds. And that’s totally okay. The truth is, as a board member, you may not have the resources or bandwidth to truly maximize your financials. That’s why it’s especially important to work with an HOA financial services company. They should have a large portfolio and existing relationships with banks in order to obtain competitive rates on your behalf. Plus, they understand the overall impact that increasing returns can have on an association’s goals and long-term health. After all, your HOA is a corporation that has unique and specific needs.

For example, FirstService Financial is able to leverage its existing relationships with more than 30 banks in order to provide FirstService Residential clients with higher rates on money market accounts. On average, FirstService Residential clients earn rates that are 4 to 5 times higher than the national average.  

A solid financial services company will also help your association choose the right bank and a vehicle that offers safety, liquidity and return to ensure your association’s short- and long-term stability. For more information on how to choose the right banking program for your association, visit FirstService Financial.  

5. Review your HOA investments regularly.

You already know that board members should be reviewing their financials on a regular basis. But did you know that reviewing your reserve fund investments is equally important? This is particularly the case if you are not working with a financial services company that has existing relationships with banks. Banks often offer teaser rates to customers, which will go away over time. You and your fellow board members should review your portfolio at least quarterly to make sure the rates don’t change. 

Additionally, if you have an HOA Investment Policy (see below), you should be reviewing it on an annual basis as well. Partner with your management company and financial services company to ensure that you do not need to make any amendments based on changes to your financials. 

6. Create an Investment Policy. 

Last but certainly not least, having an Investment Policy that outlives the current board is critical. According to Chung, “An Investment Policy guides and protects the association and board directors for years to come.”

She said, “You may currently have an experienced and responsible board who is doing their fiduciary duty, but due to board turnover that may not always be the case. An Investment Policy is critical in providing continuity of prudent investment decisions that safeguard the association’s assets.”

Additionally, an Investment Policy defines how and where an association should be investing its funds to maximize on the yield and ensure liquidity without compromising the safety of the funds. This is critical for ensuring that your community financials remain relevant well into the future. An HOA financial services company can help facilitate this process by walking you through each step and making recommendations to help you develop an effective plan for the future. 

Disclaimer: This article is provided for information purposes only and does not constitute legal advice.
Friday August 24, 2018