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Managing Other People’s Money

With many readers of this blog having a fair knowledge of investing and capable of making their money serve them, it is not unlikely that some readers have become investment advisors for relatives and friends (assuming they have opened up about their investment knowledge). It is probably not debilitating to the relationship as long as these conversations stay as informational talks. However, there are some cases that could extend into the role of investment advisor where the counselor actually controls where the money of the consulting party is invested. Is this a wise move even if the advisor has the knowledge to succeed (read: provide better than the GIC returns that the consulting party may be getting) and maintains a fiduciary duty? Let us find out.

An Advisor with No Fees

With the relationship being the bond, a few people might view this opportunity as a chance to settle on an investment advisor for free, who they can keep by taking them out to a great restaurant occasionally (or periodically) as an expression of gratitude. In such cases, it may seem nice of the knowledgeable person to share his knowledge for free and the receiving party to express their gratitude by buying dinners and gifts. But, in reality, it may be the start to putting the relationship under stress.

Generally, people who look for advisors within the family/friend circle may not have a good understanding about the risk/reward profile of an investment (among other terms of investing). They would probably expect their free advisor to “take care of everything” and simply provide them with a good/great return to help them meet their financial goals. They may not understand economic cycles and may live with the assumption that a stellar return achieved by the advising party one year could be repeated for the foreseeable future. Evidently, such pitfalls can be avoided by explaining that “past performance is not an indicator of future results” but then, they might start comparing the advisor’s own returns to theirs. In such a scenario, unless both portfolios were invested in the exact same manner (unlikely as the risk tolerance may not be the same), the returns will differ.

On the contrary, if the relative or friend’s portfolio does well, then the free-of-charge advisor may begin to resent the fact that they are doing a lot of work to benefit the relative/friend without any compensation. All these situations will give rise to questions, suspicion, and unwarranted emotional stress.

Legality

Serving as a relative or friend’s investment advisor may involve legal traps. In a non-business setting of this arrangement, where no consideration is given by the promissor (advice-seeker) to the promisee (free-of-charge advisor), there may be no contract. Delving into the legality of such an arrangement is beyond the scope of this article, but it would be remiss to not consider the dinners and gifts as “something of value” given in exchange for the services of the promisee to the promissor. In addition, if the advisor takes a payment or two at the insistence of his overjoyed relative/friend when the returns were good in a particular year, it makes the situation ripe for a legal battle.

As should be known to someone who is considered knowledgeable enough to be asked to mange another person’s money, investment advisors must be registered and possess a license to ply their trade. If the “friendly arrangement” involves compensation, then it may become a case for the courts to decide.

Teach to Fish than Giving a Fish

If a relationship is valuable enough to be preserved, then it may be prudent to avoid bringing money into the picture. The best help to offer may be to suggest books, websites, and blogs that the relative/friend could read and get their feet wet in investing. Of course, the knowledgeable person could always offer their view on a certain topic when consulted, while also pointing them to forums to ask their questions and get a second (or third) opinion. As tough as it may be to refuse to manage a relative/friend’s money, it may be the better option for both parties in the long run.

Have you managed (invested) another person’s money? Was it an elder member of your family? If so, how did they express their appreciation for your help? Did a relationship turn sour because of such an arrangement?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.  You can read his other articles here.







11 Comments, Comment or Ping

  1. 1. DanP

    Being in wealth management professionally, I would recommend you tread very carefully if you are considering managing a friend or family members money. What makes financial sense, sometimes doesnt make emotional sense, and a large part of money management is dealing with peoples emotions.

  2. 2. Slacker

    I started to advise my mother to switch from the expensive 2.5% mutual funds to TD e-series mutual funds. I think she has an expectation that I’ll help her figure out which investments will be profitable without risk. I tried to explain to her that’s not what I’m helping her with.

  3. 3. Andrew F

    I think the best thing you do to help your friends/relatives is to help them overcome analysis paralysis. There are so many investment options today that human nature is to do nothing for fear of doing the wrong thing. Steering them to some good resources and offering your second opinion on any advice they get from a professional (ie, is this person trying to pull a ‘smash-and-grab’ with churning your assets through a series of DSC funds, then stop returning the clients’ calls) is probably as far as you should go. Unfortunately there is so much bad faith in the ‘investment advice’ aka MF sales business that said relative/friend are likely to throw their hands up in despair because every professional they meet intends to fleece them to pay for the new Beemer.

  4. 4. Fit

    lol I am a firm believer of the “if you are so good at investing, planning, beating the pros, etc.; why are you not doing it professionally?” mentality haha

    Everyone is different. Dan P is right on the money! Pardon the pun haha. Ignoring the crooks, a good financial planner is not only versed in financial matters, but people management as well. You need to be able to explain concepts, strategies, and understand what each person is trying to achieve.

    Just because you are god’s gift to investing, doesn’t mean you should be advising people what to do. Working with family and friends is always difficult haha

  5. 5. Joe

    A fee-only financial advisor has the incentive to give you good advice on the basis that you’ll return. A run-of-the-mill commissioned financial advisor inherently faces the moral hazard of balancing their interest to extract fees from a Client’s account with their fiduciary responsibility. If you are doing financial planning for, say, a parent, who is going to be leaving you an inheritance, I can’t help but wonder. Isn’t this a far better incentive to protect assets and produce long-term wealth than the perverse incentive for commissioned advisors? I’m not arguing that it’s wise or legal to “ply the craft” of a financial advisor without proper licenses. I’m asking this from the standpoint of econ and incentives structure.

  6. I think it’s okay to advise someone about how to manage their investments, but when it comes to specific investments – I think family and business should be kept separate.
    We have an uncle who asks us for “stock tips” every time we see him. We try to avoid giving specific answers (i.e. we’ll throw out a bunch of different ideas) because we don’t want to be held responsible if the investment doesn’t do as well as expected.

  7. 7. Amiel B

    Great blog, learning a lot. How do I go about finding a “fee-based” financial advisor? I don’t have any friends who use one; and based in Toronto, I’m not so willing to google it.

  8. 8. Ed Rempel

    Hi Clark,

    Advising family on their investments can be tricky. I know some financial advisors who refuse to manage their family members’ investments.

    The tricky parts are:

    - clearly agreeing on the scope of the advice and any compensation.
    - clearly agreeing on the risk & return expectations of the investments, including the worst-case scenario.
    - honestly disclosing your investment knowledge.
    - dealing with the emotions, especially in a market crash.

    I have seen quite a few cases of people looking after money for family members, often aging parents or younger siblings. The biggest advantage in most cases is the genuine desire to help a non-knowledgeable person. The biggest disadvantage usually is the low knowledge level of the person giving advice.

    For the non-knowledgeable person, they may trust their family member, but don’t know how to evaluate whether that person is knowledgeable.

    Most of the cases I have seen result in recommending either extremely conservative investments (100% GICs) or the same investments the advising person buys, when the family person has a very different risk tolerance.

    Relationships like this can work for a while, but then collapse the first time things go wrong. That is why you need to discuss what can go wrong with your investment strategy and what will happen in a market crash. Every investment strategy will underperform in some market conditions, and both parties must be clear on this.

    The key is being fully open and sincere, and going with your gut as to whether this relationship is really a good idea.

    Ed

  9. 9. Howard Hare

    I managed all my Family’s monies, several millions of dollars,my results have always been well above markets,in one smaller portfolio of a hundred thousand I managed over 82%(bragging)

    I did not charge initially,but then decided ,due to all the time involved, to ask for a small amount,promptly refused by most of them,so I refused to do anymore and told them to go to an FA.

    I hear nothing but complaints about fees,unanswered calls, poor performance etc.

    I only kept my Dad’s account,but that was out of self interest,the more he made,the more I inherited.

    Several have asked me to look after their monies,but I refuse,my own portfolio has become very time demanding,spit between four family members I am now planning my children’s estate.

    I sent this article to all my family,great reading.

    Several have a few million,but do not know the difference between a bond or a GIC,and have zero interest in learning.

  10. 10. Fit

    the biggest problem is the lack of understanding of what the investment manager actually does. Again, assuming the manager is on the “up and up” and that they create value, most family members/friends don’t actually know what you/manager actually does. Do you suggest investments? Do you financial planing? I also think that you and your new “client” need to understand what the criteria is for the professional (not personal) relationship needs to end

  11. 11. David Hastings

    I’m not only bothered by the fact that the effing government thinks it’s any of their business to get into the middle of ANY arrangement I make with friends or family, but also the fact that so few people these days seem to even question the idea that government should be involved in every aspect of our lives.

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