Associations have a legal responsibility to ensure that their reserves are invested with care, says Ahmed Farruk, senior consultant at DiMeo Schneider & Associates, LLC. The right investment strategy ensures that objectives are clear and risks are managed.
What are one or two best practices that associations should adhere to when overseeing investments?
First, there needs to be a written investment policy that defines investment objectives, time horizon, and risk tolerance. The policy should include reference to what kinds of investments are allowed or prohibited, as well as the roles and responsibilities of all parties involved. The policy not only provides guidance to outside advisors, but it also serves as a durable, living document for the association.
Second, associations should regularly monitor performance against predetermined investment objectives and a collection of broad market indices that is representative of the strategy itself. Without monitoring, there’s no way to determine if a strategy is working or not.
What’s the most common mistake associations make with their investment strategy?
Many associations simply have no idea what they’re paying in fees. That’s not entirely surprising, since there are myriad fees that can be charged in myriad ways, some more transparent than others. Common examples of the latter include internal expense ratios of mutual funds, front end (and back end) mutual fund charges, trading commissions, and distribution fees (also known as 12b1) paid by the fund company to broker/dealers.
What fees should they expect to pay?
Associations can expect to pay fees for an outside investment advisor, who helps set policy, set strategy, and identify managers to execute the strategy. Fees also cover the services of underlying investment managers (such as mutual funds), whose job it is to execute parts of the strategy, as well as transaction costs.