For associations with large reserve deposits, using an investment adviser to develop a written investment policy is a good idea. Do NOT pay a board member
to manage your funds. Instead, use an independent third party professional to develop a sound investment policy
. Also, have your attorney review your governing documents to see if there are any restrictions on how monies can be invested. Following is an example of what not to do:
Paid Board Member
. A homeowners association in Northern California received millions from a construction defect claim. The board paid a fellow director $75,000 to manage the funds. In addition, the director was allowed to receive commissions and trading fees on the funds.
The paid financial adviser did not resign from the board--he continued as a board member and voted on matters directly affecting his control of the funds. Because he financially benefited from the use, management, and spending of the settlement funds, his votes ceased to be arm’s-length. This created a glaring conflict of interest
. Another problem with the arrangement was the director's unwillingness to follow the board's instructions. While an independent, third party financial manager will follow instructions (or face potential liability and loss of business), interested directors often do not feel such constraints. They sometimes feel it is "their" money and will act outside the scope of their authority both as a director and a money manager. That occurred in this case.
Stock Market Losses.
Without board approval, the director invested $3 million in the stock market. His investments resulted in losses of $400,000 before the board took steps to regain control of the situation. Before it was all over, the amount of lost principal was close to $1 million.
: Boards should NEVER pay fellow directors to manage their association's money; they should use outside professionals. Boards should adopt investment strategies that preserve capital
while earning a reasonable return.
: Associations needing legal assistance can contact us
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