Overview Discussion Many clubs try to separate in investment functions from the administrative functions. To that end, many pay expenses out of funds assessed to members as fees. There are several problems with this. Fee assessments are discussed separately (click here), but let's take a look at the history of this separation between investing and administration. The NAIC Accounting Manual, which has not been updated since 1991, says Some clubs elect to account for their expenses in a separate set of books. They may also fund the expenses by periodic assessments paid in addition to the regular monthly deposits for purchase of securities. In this system each member's distributive share of the expenses is separately furnished at year end. This was a very unfortunate statement. Since we do not partake in illegal activities such as money laundering or bookmaking, we really have no need for two sets of books. So, let's take a stand that we want only one set of books to cover all the activities of the club. Within that framework, is there an advantage to separating the investment and administrative functions? Some clubs would say they want to measure only their investment performance, and therefore, they don't want the administrative expenses mixed in to degrade that performance. That seems rather short-sighted. If there is an advantage to operating as an investment club, performance ought to reflect expenses of operating in that fashion. If we are to compare our results with a mutual fund, we must recognize that the mutual fund's performance reflects administrative costs. It is true that in the formative years, administrative costs of an investment club might seem rather high in relation to the funds invested. The club might purchase some accounting/tax software. However, this situation is rather short-term, and as the club becomes more mature, administrative costs should not be a significant percentage of the total funds collected. Other clubs maintain a separate bank account to pay for administrative expenses, citing the need to separately budget and account for these expenditures. Here, again, there is no real need. It should be quite easy to estimate how much is going to be required for administrative expenses each year. Paying such expenses out of a separate bank account is not going to help with the accounting, since the computer programs make no distinction from what account expenses are paid in the Statement of Income, where such expenditures are reflected. There is also a history behind the practice of paying expenses out of funds raised by assessing fees. A manual, printed in 1999, had this statement. Most clubs use fees to pay for deductible club expenses such as rent on a meeting place, NAIC dues, subscriptions to investment periodicals, office supplies, etc. This is another very unfortunate statement, and was a large factor in having many clubs assess fees to finance their administrative expenses. The use of fees, and the resulting imbalances, are discussed separately (click here). Suffice it to say, here, that assessing fees for administrative expenses is a very bad practice, and tends to create an imbalance in favor of those members who own more units. In 2004, the IClub manual was finally corrected in the matter of paying for expenses out of fees. The April 2004 version of that manual (pg 37) says: 1. Fees are to be used for penalty transactions such as late fees, reimbursements for bounced checks, etc. Members do not receive units for fees. 2. Payments are to be used for all deposit transactions which are not fees. The number of units purchased depends on the value of a unit on the date the payment is made. Members receive units for payments. Finally, we have guidance that fees are only to be used in penalty transactions, and therefore should not be used to fund expenses. Unfortunately, many clubs have not seen IClub's revised manual. (Click here to download the manual.) Comment on this Page Last Modified 2009-05-22 |
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