Investment Clubs: How to start your own

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If learning how to invest and increasing your wealth are high on your priority list, consider launching an investment club. These are partnership organizations typically formed by friends, family, co-workers or neighbors to invest in various assets, such as stocks and bonds. According to the National Association of Investors Corporation (NAIC), the number of investment clubs in the United States more than doubled over the past three years. Currently, there are more than 6,000 investment clubs nationwide, with assets exceeding $117 billion. More than 42 percent of these clubs consistently outperform the S&P 500, a feat most professional money managers are unable to achieve. Forming an investment club and making it successful entail the following:

Understanding the value. An investment club allows members to benefit from the group’s combined experience while exposing them to investment options available only through having a large pool of investment funds. The investment club environment forces members to stay focused, which is imperative for creating personal wealth.

Selecting members. Most investment clubs are composed of people who have some affiliation with each other. While members may know each other, it is important for all to have the same general goals. A prospective member who wants to double his or her money in three years and then take the money out of the pool likely will not be a good club member if the other members are interested in long-term wealth creation. Similarly, a prospective member who is skittish about committing to the monthly contribution and simply wants to “try the investment club out” likely isn’t a good fit for a club that’s serious about achieving financial success. Keep in mind that all members of the investment club are owners of the club, and club members essentially are going into business with each other. In accepting club members, use the same principles as you would in selecting business partners.

Consider the following when selecting members:

• Does the candidate possess a high level of personal integrity?

• Is the candidate committed to long-term success?

• Does the candidate manage his or her life with a high degree of discipline and financial responsibility?

• Does the candidate desire to build wealth beyond what they currently have?

• Is the candidate willing to share in the workload?

• Does the candidate desire to learn more about investing and wealth creation?

Prior investment experience should not be a factor since members learn from each member’s expertise.
Organizing a legal entity. Organize the club as a legal entity in line with the types of investments the club will make. Most investment clubs are organized as partnerships. However, it is important to understand the different organizational options before incorporating your investment club. Consider incorporating in your home state, but review the option of incorporating the investment club in Nevada or Delaware, where laws for the formation of corporations are favorable. Select a name for the club. It could be straightforward or exotic. One group of women named their club the Stroke of Luck Club because each of their husbands had a stroke around the same time.

Developing an agreement. The founding members should develop an operating agreement that governs the activities of the club. The agreement must address the types of investments the club will consider; how investment decisions are made and executed; frequency of meetings; the amount and timing of member contributions; forms of contributions (cash, check or direct deposit); the process for members to liquidate their interest in the club; adding and removing club members; and disbanding the club. The agreement also should outline the role and term of the club’s officers and the frequency of elections.
Key officers and their duties are:

• President or presiding partner. Sets and presides over meetings; plans activities; ensures that club members remain motivated to participate in the club.

• Vice president or assistant presiding partner. Assists the president in managing the investment club. May also be the education officer.
• Financial partner or treasurer. Deals with the brokerage company; executes purchase and sale of stock; keeps records of the club’s holdings and each member’s ownership share in the club.

• Recording partner or secretary. Keeps minutes of each meeting; reminds members of meetings when necessary; manages written correspondence with club members.

• Education partner. Responsible for planning education programs for members, which may include field trips, guest speakers and assigned readings.

• Investment partner. More sophisticated investment clubs may employ an investment officer who provides overall investment counsel to the club, explores alternative investment options and works with the financial partner to ensure that the club is achieving expected returns on investments.

Registering your club. The investment club must register as a business with the federal government. You will need to apply for an employer identification number (EIN) and file a Certificate of Conducting Business as Partners form in your state or county. Like all business entities, the club is required to file an annual tax return. Each member will file a Schedule K-1 for the club with his or her own tax return.
Most investment clubs are not required to file with the Securities and Exchange Commission (SEC). However, it is important to review the rules for filing your club with the SEC to ensure that you meet all requirements.

Building a resource base. The resource base of any investment club is critical to its success. Your most important is the NAIC’s Better Investing Unit (www.better-investing.org), which you should join.  Information about the unit’s service package for investment clubs may be obtained by calling memberships services at 877-275-6242.

Better Investing has chapters nationwide and more than 1,500 trained volunteers committed to supporting your investment club through seminars, workshops and events. Other helpful resources are Investment Clubs: How to Start and Run One the Motley Fool Way by Selena Maranjian and Starting and Running a Profitable Investment Club by Thomas E. O’Hara and Kenneth S. Janke.

Implementing a structure. Herb Barnett, chairman of NAIC Computer Group, says most investment clubs that are unsuccessful fail within their first year. He advises that you first make sure all club members are on the same

investment wavelength. “If some members of a club are interested in ‘playing the market’ rather than taking a more studied, long-term approach, the conflict has the potential to tear the club apart,” he says.

Lack of consistent attendance is another big contributor to failure. Meetings should adhere to a tight agenda so that members maximize the time together and have the ability to make decisions. Focused meetings keep members interested and willing to make attendance a priority. They also set the standard for the next generation of club leadership.

Barnett also notes that accounting problems, such as the calculation of ownership interests, have caused the demise of many clubs. Many clubs like to believe that each member has an equal share in the ownership of the club.

Over time, however, ownership can become uneven, causing conflict. To avoid this, ownership should be based solely on unit interest. Everyone is comfortable with the notion that ownership interests may rise and fall for each member, depending on their personal circumstances and the experience of the club over time.    

David Hinson is the president of Wealth Management Network. He may be reached at 646-375-2388, or at dhinson@wmnllc.com.