Expert Tips for Club Treasurers: Part III
So, let’s be honest. For some of you, right up there on your Top 10 list of the experiences you hope to avoid in life – say, public speaking and a close encounter with a tarantula – is the job of club treasurer. You never know. You might get lucky. While some clubs rotate the position so that every member has the opportunity to serve (a method that has a lot of plusses), other clubs have a member who so loves the job that you’d have to wrestle it away from him or her. It’s the luck of the draw, really.
Even if you somehow manage to escape serving as your club’s treasurer, there’s still plenty you should know about what a club’s treasurer should – and should not – be doing. Despite the adage, there’s truly nothing blissful about ignorance.
In Parts I and II, club accounting expert Gene Rooks shared her Top 10 expert tips for terrific club treasurers. In the remaining columns, experts Herb Barnett, Ira Smilovitz and Rip West will share their thoughts on what every club member should know about the office of the treasurer, tax law changes and high-risk investments, and the proper procedures for member withdrawals.
Herb is currently the co-treasurer of three investment clubs and, along with Joe Craig and Doug Gerlach, was the co-founder of the original BetterInvesting, Inc. website. He is a frequent speaker at BI chapter and national events. Herb currently serves as one of ICLUBcentral's volunteer club accounting advisers and is a member of the beta test team for Club Accounting 3 and myiclub.com. In this third installment of the series, he shares his insights on why partners can never really be equal as well as the insidious nature of transaction costs. Read on.
1. Forget “Equal Partners.”
“Equal partners” is more illusion than reality. It’s a pie-in-the-sky idea that sounds good at the time that a club is organizing, but one that truly isn’t practical in the long run. “A lot of clubs, when they get started, form under the premise of – ‘Hey, we’re all friends and we want everyone to be an equal partner,’” Herb says. “Members believe everyone should contribute the same amount of money and that will enable the club to avoid any fancy bookkeeping. But there are some definite traps to that philosophy.”
For one, if you’re a member of a successful club that stays together for the long haul, the “equal partners” notion will make it difficult for new members to join. “It’s a little awkward to tell a prospective member that he or she needs to write a check for $20,000 in order to buy into the club as an equal member,” Herb says. “And even if a new member can afford to buy in, the notion of equal partnership still doesn’t work. As soon as a member is late on a payment or goes on vacation and makes a couple of payments ahead of schedule, it throws ‘equal’ out of whack.”
At first glance, it seems the simple way to go, but in reality, it’s not practical. In fact, allowing members to contribute varying amounts is not only advantageous to the club, but easy to track with ICLUBcentral’s Club Accounting software (http://www.iclub.com/products/p_accounting.asp).
2. Do not enter payments that are due, but not made.
The bottom line here is that treasurers should only record transactions that have occurred, not those that are supposed to occur. “If a member doesn’t make a ‘required’ monthly payment, then nothing should be recorded for him or her,” Herb says. Treasurers should only enter the checks received, because the club is going to make investment decisions based on the amount of money in the account. If the books say there’s a thousand dollars – or even $75 – more than there actually is, it’s going to cause problems. There’s no way in club accounting to track entries that are pending – you have to stick to the transactions that actually occur and record them when they occur. Also, a late payment must be recorded when actually received, not back-dated to when it had been due.”
3. Be aware of your transaction costs.
The philosophy that an investment club should be fully invested at all times can be misinterpreted to mean that every dollar taken in should be invested immediately. But that’s not the intent, Herb points out. Instead, clubs should keep transaction costs in mind. “If the club has $200 to invest and invests it in a stock with a $10 transaction cost, you’ve taken a 5 percent hit right away,” Herb says. “In a case like this, it’s better for the club to hold off until it has collected $1,000. Then, instead of 5 percent, the transaction cost is 1 percent of the investment. That gives the club a much better chance to make a gain on the investment.”
4. The treasurer should not take any actions that have not been authorized by the club’s members.
Sometimes, the club treasurer assumes too much power – and the results can be disastrous, despite the best of intentions. Herb relays the story of a club treasurer who decided the club’s DRIP plans were too much work. “He cashed out all of the club’s company-sponsored DRIP plans and moved all of the shares into brokerage DRIP plans. Problem was, the company-sponsored plans didn’t charge transaction costs for the small additional monthly investments, but the brokerage account did. The club got hammered with transaction costs.
“The treasurer had never consulted any of the club members,” Herb says. “He’d gone off on his own tangent.” The end of the story? Not so pretty. At the club members’ insistence, the treasurer moved all of the accounts back into the company-sponsored plans, paid the associated fees out of his own pocket – and was kicked out of the club.
5. The treasurer should provide complete, accurate, and current reports at every meeting.
Some treasurers, Herb says, are pretty loose when it comes to what and how they report on the club’s progress. The best club treasurers are the ones who come to each meeting armed with a current Club Valuation Statement, Member Status Report detailing what each member has paid in since the last meeting, and a Transaction Statement showing any sales, dividends received, expenses, and the total amount of all payments received. Members should receive these reports either as a printout at each monthly meeting, or by email, every single month.
6. The valuation date does not have to match the end-of-month date.
Some club members feel compelled to reconcile the club’s books with the broker’s end-of-month statement. As Herb points out, that’s not only unnecessary, but it’s not the purpose of the valuation statement. In fact, the best valuation date is the one that occurs closest to the club’s monthly meeting – whether that’s the first or last day of the month – or anywhere in between. “If your club meets the fourth Tuesday of the month, a Valuation Statement that was completed on the first day of the month to coordinate with the broker’s statement is far less useful in the club’s decision-making process than one that is completed a couple of days before the meeting. What is important is that the number of shares, and the cash available are correct. Share prices change constantly.”
Herb completes the monthly Valuation Statement for each of the three clubs he belongs to following the close of business the day before the club meets. “A lot can change in three or four weeks,” he points out. “One stock can take off and another one can go into the tank. A club’s portfolio balance can change dramatically. It’s easy to go online and check the broker’s transactions close to the meeting date – there’s no need to wait for the statement to come in the mail.”
7. Never delete records of stocks that have been sold or members who have withdrawn. It’s an important part of the club’s history.
Sometimes, the club treasurer does not properly process a withdrawal or the sale of a stock – and as a result, the transaction continues to show up on the club’s Valuation Statement and/or Member Status Reports month after month. “Some treasurers will get frustrated with this and go in and delete the records for that member or that stock,” Herb says. But that’s the wrong way to go about it. “All of the transactions the club has made since its inception are part of the club’s history and factor into the club’s overall return. If you delete any part of the club’s records, you throw off that calculation.”
The solution? “If the member is still showing up on the reports, you need to delete and re-enter the withdrawal correctly. If a stock is still showing up, you need to go back into the club’s records and record the sales transaction correctly. Once you do that, your problem is solved.”
I want to thank Herb for sharing his words of wisdom. Next time, I’ll be working with yet another expert on the topic of investments that are appropriate for investment clubs – and those that are not – as well as advice on how to keep up with the latest IRS rules and regulations. Don’t forget – there’s still time to post a question for this series!
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