BI > MAY 2006

For New Members, Keep It Simple

The More Flexibility, the Bigger the Pool of Candidates

Q. I volunteered to report on possible ways of promoting new memberships. We have interested people, but they do not want to buy in at the current membership holding of $10,000. We discussed the option to join at 50 percent of the current membership value. The question then is about voting rights. I would appreciate any comments you may have about how other clubs handle new memberships. We have never given out dividends. Any ideas on dividends would also be appreciated.

Joseph Cunningham

A. What you're describing is called a buy-in contribution. Though some investment clubs require equal shares, it's not necessary. I recommend you require new members to pay only the regular monthly capital contribution amount set forth in your partnership agreement.

The language of the typical partnership agreement says this about capital contributions: "The partners may make capital contributions to the partnership on the date of each periodic meeting in such amounts as the partnership shall determine, provided, however, that no partner's capital account shall exceed twenty percent (20%) of the capital accounts of all partners."

The best clubs I've come across have rules that are simple and allow the greatest flexibility. Notice that the rule I referenced sets a minimum requirement, but it doesn't necessarily limit the amount a new member contributes to the club. So long as it doesn't exceed 20 percent of the club's value, of course. By adopting this partnership language, your club offers the maximum flexibility to potential members while keeping the rules simple.

Look at it this way: Assuming your minimum capital contribution is typical -- say, $50 a month -- a new member could enter the club by contributing an amount between $50 and $10,000. Thus, you expand the pool of potential members. A bigger potential member base means you can be more selective about who joins your club, rather than accepting only those who can afford a high entrance fee.

As for voting rights, clubs typically opt for rights based on club worth for financial transactions and on simple majority for all other business. I'm not sure what you mean by dividends. I'll assume you mean making regular partial withdrawals for each member. I wouldn't make this a requirement of the club members. You really need to keep your money invested to allow it to grow to its full potential. If your partnership allows partial withdrawals, members may do so when they feel it's appropriate.

Q. Our club is currently evaluating our bylaws and considering a change in the financial expectations we ask of new partners. We are wondering what some clubs deem a fair amount to ask their new partners to pay upon joining.

Charlotte Sutherland

A. Startup costs such as county clerk fees, club accounting software, check printing and educational supplies are all expenses the founding members of an investment club pay. Members who join after these expenses have already been borne reap the benefits without having sacrificed any of their own money. Therefore, many clubs ask for a one-time fee, called an initiation fee, to offset expenses incurred by original members.

Initiation fees vary widely from club to club. Most successful clubs choose to charge either no initiation fee or a very low one -- for example, a fee equal to or less than one capital contribution.

The problem with charging higher initiation fees is that new members will usually show a loss for a long time. That might cause them to become discouraged and leave the club.

As an alternative, you could require a larger buy-in contribution. But as mentioned in the previous answer, this can lead to problems as well.

But in any case, when it comes to new members, keep things simple and financially accessible.

Ask Colleen your club question by writing to colleen@ColleenMulder-Seward.com. Colleen holds an M.B.A. from Wayne State University. Since 2000 she has served on the board of directors for BetterInvesting's Southeastern Michigan Chapter. Colleen also writes the Retirement Intelligence Information Services newsletter for retirementcalc.com.