In our previous HOA budget survey, a whopping 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 – see #6 to learn more and download a free guide here).
1. Only invest in money market accounts and CDs.
As a fiduciary, your duty is to safeguard your association's assets. This requires placing investments solely in FDIC-insured money market accounts and CDs, while steering clear of high-risk investments such as mutual funds, bonds, and stocks. Unintentionally, some boards opt for these risky investment strategies, potentially inviting repercussions. For instance, a drop in these unstable investments may result in a lack of reserve funds needed to carry out scheduled maintenance tasks.
Moreover, if a board member partakes in high-risk investments, they may face legal issues. Inappropriately investing reserves may lead to a lawsuit from a resident, accusing the board of violating their fiduciary responsibility and jeopardizing the community's financial stability. By choosing to invest exclusively in FDIC-secured money market accounts and CDs, you safeguard your association and community.
2. Trust HOA professionals for investment advice.
Choose a reputable community management company and financial service provider to guide your board's investment decisions. While some boards self-educate using online resources or financial periodicals, that time could be more effectively used to improve your 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.
HOA board members must comprehensively understand their role and responsibilities in managing reserve fund investments without overreaching. Gaining basic insights into HOA financials is key, including their fiduciary responsibilities and the significance of being well-informed about HOA investments and financial obligations. Engaging with a reliable financial services company, or independently, it's important to ensure your association opts for safe, proven investments such as money market accounts for liquid funds and CDs for long-term investments. Observing state legislation for individual requirements in managing and regularly reviewing reserve funds is also critical for your association.
4. Work with an HOA-specific financial services company
Understanding the complexities of HOA reserve funds goes beyond the basics. Even as a board member, it's not expected for you to be an expert in optimizing these financial assets. That's completely alright. With limited resources and time, maximizing your HOA's finances can be a challenge. That's where the value of an HOA financial services company shines. These experts wield a vast portfolio and cultivated relationships with banks, securing competitive rates for your funds. Moreover, their nuanced understanding of how increased returns influence an association's goals and long-term health is invaluable. After all, an HOA functions like a corporation, with specific and unique financial 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
It's common knowledge that regular financial reviews are a must for board members. However, equal importance should be placed on routinely evaluating your reserve fund investments. Especially if you're not partnered with a financial services firm that has pre-existing ties with banking institutions, continuous review of your rates is fundamental. Banks tend to lure customers with attractive introductory rates that eventually fade. To avoid rate changes, you and your board colleagues should conduct a quarterly review of your portfolio.
Additionally, if you have an Investment Policy (see below), you should be reviewing it on an annual basis. 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.”
Furthermore, an investment policy outlines the optimal paths for an association to invest its funds, maximizing returns while ensuring liquidity and safety of the funds. This is paramount for preserving the relevance of your community's finances far into the future. HOA financial services company specializes in HOA reserve funds and can streamline this process, guiding you through each step and providing informed recommendations to construct a potent plan for the future.