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.
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.