Academy/Working With Professionals
Investment advisers
Know whether you hired a fiduciary or a salesperson before reserve funds move.
An investment adviser is typically a fiduciary who must act in the association's best interest, often SEC or state registered. A broker is usually paid by commission and only has to recommend something suitable, not necessarily the best option. Ask directly which one you are hiring, then check your state's investment rules and your own reserve policy.
An adviser and a broker are not the same relationship
Two different professionals might offer to help the board with reserve funds, and they are not bound by the same rules. An investment adviser is typically a fiduciary, someone legally obligated to put the association's interests ahead of their own, and is often registered with the SEC or a state securities regulator. A broker is typically paid a commission on what they sell and generally only has to recommend something suitable for the association, not necessarily the option that serves the association best.
Neither title is illegal to hold, and neither one is automatically the wrong choice. What matters is that the board knows, before any money moves, which relationship it is actually in.
Put the relationship in writing before funds move
Ask the candidate directly, in writing: are you acting as our fiduciary, or are you selling us a product? How are you paid, flat fee, hourly, commission, or a percentage of the funds under management? What license do you hold, and with which regulator, so the board can confirm it independently rather than take the candidate's word for it.
Put the answer in an engagement letter or investment policy that states exactly what the person is authorized to do with reserve money and how. A verbal understanding about handling the reserves conservatively is not a scope of work; a written one the board can check the person's actions against is.
What protects the board, and what varies by state
Whether your state restricts how association reserve funds may be invested, and what license someone must hold to advise on them, varies by state. Check your state's HOA statute and your own reserve or investment policy before signing anything, and do not assume a rule you read about elsewhere applies to your association.
Following a qualified professional's reasonable advice also matters for the board's own protection. Courts applying the business judgment rule generally protect a director's decision made in good faith and reasonable reliance on a professional's advice:
"A director is entitled to rely on information, opinions, reports, or statements prepared or presented by legal counsel, accountants, or other professionals or experts."
Source: Understanding the Business Judgment Rule for Boards, Barker Martin, P.S.
That protection is conditioned, not automatic. It requires good faith, ordinary care, and a reasonable belief that the advice was within the adviser's real competence, not blind trust in whoever the board happened to hire.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The board hires someone to manage reserve investments who is paid entirely by commission on the products she sells into the account. Under this fee structure, whose interests does she have the strongest financial incentive to serve first?
A new board wants to know exactly what their reserve funds are allowed to be invested in. Where should they look first for the answer that actually controls their association?
The board followed its investment adviser's written, reasonable recommendation for the reserve account, documented the reasoning, and the investment later lost value in a downturn. What best describes the board's legal position?
Sources
- Understanding the Business Judgment Rule for Boards, Barker Martin, P.S.
- The Business Judgment Rule, Colorado Homeowners Association Law
Working With Professionals
Next, see how the board puts a professional's scope of work in writing before any contract is signed.
Whether your state restricts how reserve funds may be invested, what license someone must hold to advise on them, and what your own reserve or investment policy allows all vary by state and by association.