The Advantages to Having an Investment Policy
Pet policy? "Check". Pool policy? "Check". Late fee policy? "Check". Investment policy? "Come again"?? In the past, that was a common reaction among condo associations. But, increasingly, proactive treasurers and board members are turning their attention to creating a written investment policy to delineate how reserve dollars should be invested.
Why should a unit owner care if his association has a formal investment policy?
Prudent Investor Rule
Well, for starters, a portion of monthly condo fees generally goes toward long-term, big-ticket projects such as paving and roofing. You want the funds to be available when it's time for the driveways to be repaved and the roofs to be re-shingled. In the absence of a written investment policy, a new treasurer or new board could invest in anything because there's nothing preventing the board from buying, for example, stocks, mutual funds, commodities or any other financial instrument. In a down market, liquidating those types of volatile securities could result in a loss to reserves, thus leading to the unhappy consequence of having to special assess unit owners. Guidelines issued by the national organization Community Associations Institute (CAI) recommend that associations invest only in savings accounts, FDIC-insured certificates of deposit, U.S. Treasuries and government agency bonds. Board members serve as fiduciaries for their associations and are expected to follow the "prudent investor rule" which essentially states that fiduciaries should invest funds considering the needs of the beneficiaries, the provision of regular income, and the preservation of capital. In other words, avoid investments that are excessively risky.
Best Practices
Unit owners may rotate on and off the board but an investment policy provides continuity for an association. Board members can thus focus on other operating issues rather than spending time "recreating the wheel" each time a new treasurer is elected. Because a formal investment policy is typically drafted and adopted after calm thoughtful discussion, the investment policy serves as a steady road map regardless of how chaotic the financial markets might be.
In summary, a formal investment policy helps an association to operate more efficiently and to avoid special assessing unit owners due to investment losses.
Next article: "What Should an Investment Policy Include"?
Prepared by Denise Yuu, Senior Vice-President Investments, Merrill Lynch Wealth Management on behalf of Imagineers LLC
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