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'Fiduciary' an Often Misused Word
In the arena of association disputes, there is no term as overstated or misused as that of "fiduciary." Black’s Law Dictionary defines a fiduciary as a person acting as a trustee, that has a duty to act primarily for another’s benefit, manages money or property and who must use a standard of care based upon trust and confidence.
Historically, directors of corporations have been deemed to have a fiduciary duty to the shareholders and in 1984, that duty was extended to condominium directors on behalf of the unit owners. As common law, this duty would extend to other directors, such as townhomes and cooperatives, as well. Based upon this duty, board members must meet certain basic tests in their decision-making in order to fulfill this duty.
Directors must use "sound business judgment," and must at all times act in the best interests of the association. They must avoid self-dealing and above all, act above board in all financial transactions involving the association. Although boards of directors maintain directors and officers liability insurance, if a board member acts outside the scope of his or her authority and is deemed to have violated their fiduciary duty, they could also be personally liable as they may have stepped outside the umbrella of insurance coverage.
This weighs heavily on some boards when dealing with the issue of investing association funds. If they invest reserve funds speculatively and it loses money, or if they maintain these funds in too conservative investments, will the board members be held accountable by the membership?
It is the board’s duty to invest association funds prudently, in a risk-free investment vehicle. We are often asked if mutual funds or high-yield growth funds, or any number of investments can be selected, particular during an expansive stock market.
What the unsophisticated investor does not realize is that most "funds" are long term (one or more years) investments in order to recover built-in commissions and fees over a period of time. Also, the share prices themselves are subject to market fluctuation. If an association selected a mutual fund for investing reserves and a year later the association needed the money, there is a possibility of incurring a loss even is the share price was the same or slightly higher. This would be the case even in a "no-load" fund.
Boards of directors are charged with managing OPM (other peoples’ money). Even though there are so many investments that appear tempting, a director must always remember they are not investing their own money. Boards should be looking at safe and secure investment vehicles, even if there is a smaller return. The investment must guarantee principal, even if the interest rate fluctuates. Savings accounts, money market accounts, CDs (certificates of deposit) may seem like boring investments, but they are what the law has in mind when it defines a "prudent man" investment.
Some associations with well-funded reserve accounts should consider hiring a professional money manager as a consultant. A qualified professional can locate alternative sources for protected insured investment without incurring the risk of the more popular investment vehicles.
In my opinion, a board is not going to be sued for utilizing too conservative investments. It is more important that the association not put its members’ money at risk just for the prospect of possibly receiving a higher rate of interest. What the board must always keep in mind is that there are many types of investments being sold by reputable people who earn commissions. Even though the investment appears to be sound and has an aggressive return, it may not be right for an association. More importantly, if it loses money on a frivolous investment, the unhappy owners may be looking to the individual board members to recoup their losses.