QUESTION: While it appears most large nonprofit charities, universities, foundations, and pension plans all use some sort of balanced portfolio investing policy to earn higher than CD interest rates, and often higher than market average incomes, all attorneys and CPAs seem to advise against this proven strategy. Why are you and others not advising condo boards to recognize the risks of all investments, set a written plan to deal with them, and hire appropriate advisers to manage them?
ANSWER: Attorneys and CPAs recommend conservative investment strategies because directors will not get sued for giving up potential investment gains but they can get sued over losing principal. A small unrealized gain has very little consequence. A special assessment to replace funds squandered by the board is another matter entirely. It will significantly impact cash-strapped members, who will demand that directors personally pay for the lost funds.
"The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account." Civil Code §1365.5(c)(2).
Avoid Loss. A board's primary goal should be the preservation of the association's reserves
against loss. The board's secondary concern is a reasonable return on the monies.
- Safe Investments. Certificates of Deposit, Treasury Bills and Ginnie Mae securities are generally considered safe because they are direct obligations of the U.S. government. Simple bank savings accounts, while secure, may be too conservative because of their low rates of return.
High-Risk Investments. Financial advisers generally discourage associations from investing in mutual funds, money market funds, and municipal bonds as too risky. Boards should seek a reasonable return on the association's reserve accounts but should never adopt a strategy that emphasizes return over preservation of capital (as occurred with Orange County in the 1990's and resulted in bankruptcy when the investments collapsed).
Insured Accounts. Associations should keep their funds in
FDIC insured accounts. Sometimes an association's governing documents ill require it.
Out of State Banks. Unless an association's governing documents restrict deposits to California institutions, the monies may be kept in out of state institutions.