In investment clubs, there’s also a tendency for members to make business more complicated than it needs to be. When starting a new club, members desire to cover all the contingencies — even if they don’t know what contingencies they should be covering! The result is often that members, particularly club officers, have a harder job taking care of club business.
If you’re starting a new club, don’t worry so much about covering all the bases. The recommended partnership agreement available from BetterInvesting or the ICLUB.com websites works well without much modification for most investment clubs. Later on, if you find requirements that you’d like to memorialize in the club’s official documents, you can easily amend or revise your partnership agreement or bylaws.
The treasurer’s job is often the most time-consuming position in an investment club. There are plenty of steps that clubs can take to make the treasurer’s job easier. Many clubs end up closing down owing to difficulties in finding members who are willing to serve as treasurer, so focusing on keeping things simple for the treasurer can greatly help the club.
If you’re among the few clubs that haven’t yet gone online with your operations, the time is now to do so. Having the club’s information available at a safe, secure site can be a powerful and inexpensive way to cut down on the time required to be club treasurer.
For example, in an online environment such as at myICLUB.com, the treasurer can skip printing, copying and distributing reports for the club’s monthly meetings. Instead, the members of the club can log on and view or print their own Valuation Statements, Member Status Reports and Portfolio Diversification Graphs before each meeting. This is also a much more eco-friendly option, particularly if members can save the reports to their iPad or notebook computer instead of printing them on paper. At tax time, members can download and print their own Schedule K-1s from the site, freeing the treasurer from the task of printing those forms for each member.
With no software to install or data to exchange, changing treasurers also is as easy as changing permissions for the new officer on the site. In addition, assistant treasurers can be more easily trained, since they can work alongside the treasurer in real time, preparing reports and entering data under the tutelage of a mentor.
Clubs have some other steps that they can take to make the treasurer’s job easier. Some of these are a bit more radical than others, but taken as a whole they can greatly simplify tasks now and down the road. Jim Thomas, a director of BetterInvesting’s Puget Sound (Wash.) Chapter and a national-level instructor, suggests that clubs consider eliminating late fees.
“Assuming that the club is profitable,” he says, “members who miss the opportunities to make investments in the club are hurting only themselves.” He continues: “The treasurer job is complex enough without inventing more work, let alone unnecessary work like collecting and recording late fees. Members who fail to invest don’t really hurt anyone but themselves.”
Another way to reduce the complexity in a club is to avoid dividend reinvestment plans and automatic dividend reinvestment in your club’s brokerage account.
One of BetterInvesting’s four principles of investing is to “Reinvest all earnings.” This is often interpreted as being an endorsement of the practice of reinvesting dividends into the automatic purchase of new shares of the issuing stock, which is not necessarily the case. The principle is really meant to instruct investors not to spend their profits, instead keeping all dividends and profits working in a portfolio. Whether you reinvest in the same or a different stock is a matter of choice. Some investors prefer to choose each purchase and not to rely on automatic investing plans, believing that they can make better use of their investments in that way.
Although I’m a great fan of dividend reinvestment plans, there’s no question that they add a level of complexity to club record-keeping. Each reinvestment makes up a new tax lot, so a few years of DRIP investing can create dozens of different lots to account for, with more transactions to reconcile and audit. In addition, when selling (if not selling the entire position), choosing the proper tax lots becomes more complicated.
Investing in company-sponsored dividend reinvestment plans also means a whole other set of financial statements and paperwork, adding work to the monthly and annual account reconciliation process. Skipping these plans and only investing in a single brokerage account is a more streamlined approach.
Investment clubs should also avoid certain problematic securities. Any security with “partnership” or “trust” in its name should be generally avoided, including any master limited partnerships and royalty trusts. Exchange-traded funds that invest in gold or other commodities should be avoided as well. These cause enormous headaches for club treasurers when it comes time to prepare tax returns.
Less troublesome, but also presenting challenges to investment club tax preparation, are other ETFs, mutual funds and real estate investment trusts (REITs). Treasurers of clubs that invest in these types of securities can expect to do additional work and manual calculations in efforts to complete the club’s tax return at year-end.
Many clubs have already learned that they can eliminate the need to have a bank account by choosing an online brokerage firm that offers check-writing services.
By operating this way, these clubs are doing business through only one financial institution. This means they’re reconciling only one financial statement each month and one set of year-end statements and IRS Form 1099 reports.
Brokerage firms often accept member checks for deposit. Inquire at your firm to see the procedures for this.
You can cut down on bank branch or brokerage office visits by requiring that members transmit their monthly member contributions electronically to the club’s accounts via ACH (automated clearinghouse) or online bill-pay solutions. Commonly, each member is assigned a specific amount in cents to append to their payments. This way the treasurer can identify each incoming cash transaction by member.
Following the old proverb “A stitch in time saves nine,” there are a few essential tasks that all club treasurers should incorporate into their return in order to avoid potential future hardships.
Backing up the club’s electronic data is critical. In case of a computer disaster, having a safe, secure, off-site backup is essential to restoring your club’s records without resorting to manually recreating hundreds of transactions. (For more information on this issue, see Doug’s article in the May 2011 issue.)
Another important task not to be overlooked is to reconcile the club’s books with the bank and brokerage statement each month. Finding errors, either the treasurer’s or the financial institution’s, is a lot easier when you don’t have to wade through hundreds of transactions made over the course of months or even years.
Following these steps can help simplify the treasurer’s job, and keep him or her from singing Avril Lavigne’s hit pop song at meetings, wondering, “Why’d you have to go and make things so complicated?”