Choose Your Members Wisely

Finding an investment club is a two-way street. Here's how clubs recruit grade A investors.

Change is inevitable–and that means, at some point, founding members will leave an investment club. Whatever members’ reasons for leaving, the club must find appropriate replacements.

Typically, a prospective candidate is invited to join based on the recommendation of an existing member. “It is important to make sure that this is someone you really want in your group. This includes his or her investment philosophy, personality, and, most important, his or her character (or trustworthiness), which is harder to gauge sometimes,” says Kathleen Greer, co-founder of the Windy City Investment Club in Chicago, which started with 14 members in 1997, lost seven over the years, and now has nine.

Greer says the expectation is that club members will do some due diligence on people’s backgrounds (such as making sure they can meet financial obligations) before recommending them. But to cover itself, there are some basic things a club can do. For instance, since its inception, Windy City has distributed an application for membership to prospective members. Among the questions asked are: Can you realistically afford $50 dues per month? Do you have the time, in addition to attending monthly meetings, to commit to the club? Are you willing to commit to the club for five years? What investment experience, if any, do you have?

New members are generally asked to sit in on three meetings, during which new recruits are looked at for:

  1. Compatibility. A person isn’t right for a club if he or she doesn’t like to work in a group, since everything is put to a vote.
  2. Investment outlook. members should share the same investment goals and objectives.
  3. Teamwork. All prospective members should be prepared to investigate and analyze securities and make formal stock-selection reports.

After the fourth meeting, Windy City decides on new prospects. Even if the answer is yes, new members still endure a six-month probationary period. “They have to prove they are committed,” says Greer, which involves taking the club’s stock selection checklist course and making a stock presentation before the group. Recruits are also required to read NAIC’s Starting and Running a Profitable Investment Club by Thomas E. O’Hara and Kenneth S. Janke Sr. (Times Books, $21), as well as Carolyn M. Brown’s book, the Millionaires’ Club: How to Start and Run Your Own Investment Club–and Make Your Money Grow! (John Wiley & Sons, $19.95).

Whereas some clubs require prospects to play financial catch-up, Windy City asks for a $300 initiation fee and $50 in monthly dues, all of which is put in escrow during the probation period. Once the group accepts them as full, participating members, the money is invested. Windy City incorporated a graduated scale into its partnership agreement, so members pay a penalty when they elect to leave the group. Those who leave within one year get only 55% of their money back, while the club keeps the rest. After two years, they receive 75%. Members who reach the five-year mark get back 95% of their funds when they leave.

Instead of selling securities, the club has opted to

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