Managing Other Peoples Money

[Lizard]

Does anyone have any tips on the easiest way to manage other peoples money? I frequently get asked to invest on the behalf of others, but mostly turn it down as too much trouble. I use Power of Attorney for one family member, but even that is not always straightforward.

Sharebrokers have said they will act on my instructions if they have written advice from the client, but that doesn't cover all types of investments. Ideally, I'd like to be able to run just one or two portfolios and assign people units in them. However, I suspect there is alot of legal requirements if doing this.

Any comments or suggestions?

[whiteheron]

Lizard

I have kept clear of this on the basis that there is more possibility of downside to personal relationships than upside
Even my wife thinks that I should only invest in winners 100 % and that alone is enough to put me off investing for others
And that is without considering the question of payment which I wouldnt / couldnt take in any case

I am prepared to take the odd loss on my own investments but in no way do I want to bear the responsibility of losing other peoples money

[Cooper]

I don't know if I'm approaching it correctly, but I simply account for the money as a no interest loan (capital injection) with the repayment tied to the performance of my own portfolio. Because I've declared myself as a trader (and therefore pay tax) I simply return their money sans tax. Not sure how correct that approach is.... simply a jerry-rigged, very amateur approach.

I agree WH, but I always ensure I spell out the risks. Having to explain a bad day at the market is an interesting experience though, especially if the person you're investing for hasn't a clue about volatility and the fact that shares go down as well as up. Have a good few years, and the expectations are that you will be able to repeat it with ease the next few. My method of dealing with this is to point out that they would have been getting 3.5% after tax in their savings account. Honesty and a willingness to admit and explain mistakes are important attributes. Great "PR" experience.

[Lizard]

Cooper, Thanks for that. I've used something similar for a teenage relative. Unfortunately, doubling her money in 18 months may have given her unrealistic expectations!

White Heron - yes I tend to agree that the risk of losing all your friends in a bear market is probably a good reason for not doing it.

However, get sick of watching relatives being poorly looked after by the finance industry. Especially the elderly ones who rely on their investment income and yet no longer feel able to handle their own portfolio. Also, the teenagers with just a few $$$ that no-one is interested in, but could benefit immensely from the financial education. If I ever need to charge for my time, it will probably be conditional on performance. If I can organise it so everyone doesn't need separate portfolios, it will probably not have to be too much more time consuming than the three portfolios I already manage.

Interested in more ideas as to simple/legal ways to structure arrangements.

[limegreen]

Something I've been considering (and I have no idea of the legal implications) is the idea of setting up a company for such. You would then issue "shares" in your company relative to people's contribution of money to enterprise, and I guess keep issuing new shares as people add more money.

I'm so not a lawyer or accountant, so that may not float. Another possibility is to structure it as an investment "club". I've seen a model constitution for one. However, I guess relative to a more usual club, you take more responsibility for investment decisions.

[zyreon]

I would suggest either partnership or company, with a preference for partnership due to company fees and regulations.

partnership:
business/accounting structure, not seperate legal entity.
Draw up agreement for distribution of profits/losses and operations.
Get partnership tax form>> partners receive net taxable income from the partnership (revenue less allowable deductions) which is added to their taxable income.
the shares would be held in the partners' names

Another alternative is to be assigned power of attorney over someones account and act as their administrator... or account advisor.
the shares are owned in the account owners name, but you have authority over the account. And take a management fee which could be anything from % of assets managed, % of profits, % of profits over certain level etc.

[zyreon]

Oh Another thing i'd like to mention for this topic is track record.

I personally will not accept any money to manage at present. Because I have no long standing track record ... e.g. 5 years.

If anyone wants to put their money with me without seeing such a track record, then they are imprudent, and are likely to have a detrimental effect on my trading performance.

A track record ideally would have the net change in assets as %; annualised and adjusted for withdrawels/deposits. year by year, and overall change since inception. Also loan ratios - to indicate what kind of leverage was used to produce the returns.

[thereslifeafter87]

Not sure of the legalities of the interest free loan idea...

However, if you set up a company and issue shares to investors, you could be in breach of the Securities Act unless you comply with its requirements (register a prospectus etc...). The same goes if you allocate units in a trust.

The question is whether you are making an offer of a security to the public. An "offer to the public" includes an offer to anyone who is not a family member, business associate, sophisticated investor, or high net-worth (over around $2mill I think) individual.

Of course, all this is only relevant if someone complains to the securities commission.

[Westie]

quote: with a preference for partnership due to company fees and regulations]

Company fees are negligible these days, it is almost all done online now. $60 for incorp and name reservation, annual returns are free.

Partnerships automatically dissolve if a partner withdraws so i'd suggest a partnership may lack flexibility for this sort of thing.

[whiteheron]

An important thing to remember with any such arrangement , whether it be for one investor or a number of investors , is that at some time the arrangement will come to an end
As a consequence it will be essential , whatever the arrangement , that there is a pre determined exit strategy that will not be unduly complex and will be easy to put into practice

Assuming that there are only a handful of investors I would favour a complete separation of investments ie a separate bank a/c and recording / reporting for each investor without any mixing of funds
Once funds are mixed there will be problems , believe me !
Such problems would include;
more complex recording / accounting
unless you have an excellent system , problems in correctly segregating funds by investor ( you would need some form of nominee recording / accounting )
possible disputes as to who owns what
( this is a brief list only , by no means exhaustive )

If funds are kept completely separate by investor then these potential problems can be avoided

I dont wish to sound negative , but if things do not plan out well for one or a number of investors then if funds are mixed there can be a serious potential for disagreement / conflict

I urge utmost caution