Investing In Others: A Worthy Bet

Investing in other people can be a tricky business, and it's not just about money. It's about relationships, trust, and legal obligations. When it comes to finances, people often turn to their friends and family for help, especially if they have a successful track record as financial advisors. However, mixing personal relationships with professional responsibilities can strain friendships and create conflicts of interest. It's essential to set clear boundaries and communicate realistic expectations to maintain healthy relationships.

From a financial perspective, investing with other people's money can be a powerful tool to broaden the scope of gains. Self-directed Individual Retirement Accounts (IRAs), for example, allow owners to pool funds and invest in alternative assets like real estate and private equity. But it's important to remember that with potential gains also comes the risk of losses, which need to be carefully managed.

In the business world, investing in people instead of companies is a concept gaining traction. It's about giving talented teams the freedom to experiment, learn, and innovate, which can lead to successful and diverse outcomes.

Understand your client's investment profile

Understanding your client's investment profile is a key aspect of managing other people's money and complying with the Financial Industry Regulatory Authority's (FINRA) Rule 2111. This rule mandates that any investment recommendations made by financial advisors must be suitable for the client. To understand your client's investment profile, you need to gather and analyze information about their circumstances, preferences, and objectives. Here are a few key components of a client's investment profile:

Ability to Handle Risk

This includes three main aspects: risk tolerance, risk capacity, and time horizon. Risk tolerance refers to the client's emotional and psychological comfort with potential investment losses, shaped by their values, experiences, and financial goals. Risk capacity, on the other hand, is the client's financial ability to withstand losses, determined by age, income, net worth, and financial obligations. The time horizon is also crucial, as clients with longer investment horizons can typically assume more risk, knowing that returns will likely average out over time.

Preferences and Personality

Advisors should not overlook the client's preferences and personality when determining suitable investments. For example, if a client is new to investing, it is advisable to avoid complex strategies and educate them about different investment options. On the other hand, if the client has extensive knowledge and experience, you need to understand how much input they want in managing their assets. Additionally, advisors should be aware of any preferences the client may have regarding the types of investments they are interested in, such as environmental, social, and governance investing.

Financial Status and Liquidity Needs

Understanding your client's financial status is crucial, as it can impact the types of investments that are most suitable for them. For instance, clients in higher tax brackets may benefit more from certain types of investments, while those in lower brackets may have different priorities. Advisors should also consider the client's liquidity needs, as some investments may not be suitable for those who need immediate access to their funds due to potential penalties or negative pricing.

Investment Goals and Objectives

Knowing your client's investment goals and objectives is essential for creating a tailored investment strategy. For example, a young couple saving for their child's education may benefit from a specific savings plan. By understanding these goals, advisors can build trust with their clients and make necessary adjustments to ensure the investment plan stays on track.

By thoroughly understanding your client's investment profile, you can create suitable investment strategies that align with their needs and help them achieve their financial goals while effectively managing risk.

Be aware of the risks and your responsibilities

Investing in other people or allowing others to invest in you can be a risky endeavour. Here are some key risks and responsibilities to be aware of:

Risk of Loss

The most obvious risk of investing in others is the possibility of losing your investment. This is an inherent risk in any investment and should be approached with caution. It is important to be aware of the risks involved and learn to control them. Diversification is a common strategy to mitigate this risk, by spreading investments across different sectors, companies, and assets.

Volatility and Market Risk

Even successful companies are subject to market volatility and the risk of market crashes. Stock prices are determined by supply and demand, and if people are pulling capital out of the stock market, prices will fall. While history suggests that market crashes are temporary, it is important to prepare emotionally and position your portfolio to avoid the biggest drops.

Company-Specific Risk

This is a prevalent threat to investors who purchase individual stocks. A company's value can drop due to poor operational performance, failure to meet investor expectations, or even complete collapse. To reduce this risk, it is important to conduct thorough research and analysis of the company's financial health and potential for growth.

Liquidity Risk

Liquidity refers to the ease with which an asset can be exchanged for another, typically how quickly it can be sold for cash. While stocks and bonds are considered highly liquid, real estate and private business ownership can take months or years to sell. Illiquid assets can be difficult to unload in the event of unexpected cash needs.

Legal and Regulatory Compliance

When investing in others or allowing them to invest in you, it is important to comply with legal and regulatory requirements. In the US, investment professionals must register with the Securities and Exchange Commission (SEC) or the relevant state authorities. Failing to register before offering investment services can expose investors to undue risk and potential fraud.

Conflicts of Interest

Mixing personal relationships with professional investment services can create conflicts of interest. For example, you may feel pressured to make investment decisions that prioritise your relationship over the client's best interests. It is important to disclose potential conflicts in advance and maintain clear boundaries and expectations to ensure fair and unbiased treatment of all clients.

Unrealistic Expectations

When investing on behalf of friends or family, they may have unrealistic expectations of high returns. It is crucial to have frank conversations upfront, reminding them that you do not control financial markets or investment outcomes. Setting realistic expectations and maintaining professional boundaries can help manage this risk.

Pro Bono Pitfalls

If you decide to invest on behalf of friends without receiving compensation, be aware of the potential for unbalanced relationships and the risk of being taken advantage of. Ensure that your contributions are appreciated and reciprocated to avoid feelings of resentment and strain on your friendships.

Due Diligence

Whether investing in others or allowing them to invest in you, it is essential to conduct thorough due diligence. Understand the risks and potential rewards of each investment, and ensure that it is suitable for the investor's profile, including their risk tolerance, financial goals, and time horizon.

In summary, investing in other people or allowing them to invest in you involves a range of risks and responsibilities. It is important to conduct thorough research, understand the regulatory requirements, manage expectations, and diversify your investments to mitigate potential losses.

Set clear boundaries and expectations

Setting clear boundaries and expectations is crucial for maintaining healthy relationships and avoiding feelings of resentment, disappointment, and anger. Here are some tips to help you set clear boundaries and expectations when investing in other people:

• Understand the difference between expectations and boundaries. Expectations refer to specific outcomes that are anticipated, while boundaries are less restrictive and allow space for various outcomes, leading to less disappointment.
• Communicate your boundaries clearly and directly. Be upfront and professional, and let others know what you are comfortable and not comfortable with.
• Make your expectations clear. Help others understand what behaviour you will accept and what behaviour is expected from you.
• Be consistent with your boundaries. Letting boundaries slide can lead to confusion and encourage new expectations.
• Set boundaries early on in relationships. This way, everyone knows where they stand, and feelings of hurt, confusion, and frustration can be minimised.
• Be aware of different types of boundaries, such as physical, sexual, intellectual, emotional, and financial boundaries. Take each of these into account when establishing your boundaries.
• Reflect on the reasons for your boundaries. Understand why they are important to you and how they will benefit your emotional well-being.
• Start with a few boundaries and build them up slowly. This will help you feel more comfortable and allow time to reflect on whether any adjustments are needed.
• Practice self-love and engage in activities you enjoy. Having a strong sense of self-worth and self-value will make it easier to set and maintain boundaries.
• Gain perspective on your boundaries. While it's important to have boundaries, don't overthink them or let them dictate your life. Trust your instincts and navigate situations as they arise.
• Recognise and respect the boundaries of others, even if they are different from your own. Ask questions and use your common sense to determine what boundaries others may have.
• Be prepared to adjust your boundaries as needed. For example, the time and energy you invest in friendships may change after starting a family.
• Seek help if needed. If you are unsure how to set and maintain healthy boundaries, consider seeking advice from a professional or a trusted friend.

Consider alternative ways to help

Alternative Ways to Help

If you're a financial advisor, it's natural for friends and family to want you to manage their money. However, it's important to be aware of the potential pitfalls of mixing personal relationships with professional responsibilities. Before agreeing to take on loved ones as clients, consider the following alternative ways to help:

• Refer them to other professionals: Instead of managing their money directly, you can refer your friends and family to other qualified professionals in your network. This can help maintain your relationship while still providing them with the financial advice they need.
• Educate them about finance and investing: Teaching your friends and family about investing can be more beneficial than simply managing their money for them. Share your knowledge and experience, including common problems new investors face and practical strategies for risk management. This approach can help them make sound investment decisions independently while avoiding potential conflicts of interest or legal complications.
• Join or start an investment club: Investment clubs provide a more personal approach to investing while giving you a vested interest in your friends' portfolios. However, it's important to note that investment clubs are formal, legally defined organisations with specific rules and laws that govern them.
• Set clear boundaries and expectations: If you decide to work with friends and family, establish clear boundaries and communicate your expectations upfront. Be transparent about the risks involved and maintain professional boundaries. Let them know that your professional advice is separate from your relationship.
• Disclose potential conflicts of interest: When working with friends and family, disclose any potential conflicts of interest in advance. Explain how you will mitigate these conflicts to ensure fair and unbiased treatment of all clients.
• Maintain proper registration and licensing: In the US, investment professionals must register with the Securities and Exchange Commission (SEC) or the state in which they operate. Ensure you are properly registered before offering investment services to anyone, including friends and family, to avoid legal and ethical pitfalls.
• Consider alternative investment options: If you're looking for investment opportunities beyond traditional stocks, bonds, and cash, explore alternative investments such as peer-to-peer lending, owning your own business, equity crowdfunding, or investing in real assets like real estate or commodities. These options can provide diversification and potentially boost returns.

Know when to say no

Knowing when to say no is an important skill for your personal health and well-being. Our time and energy are precious resources, so it's essential to spend them wisely and not over-commit.

You're Too Busy

If you're already overwhelmed with work or other commitments, it's okay to say no to taking on more. Be honest with yourself and the person making the request, and don't be afraid to decline.

You Feel Guilty or Obligated

It's important to examine your motivations for saying yes. If you're only agreeing out of a sense of guilt or obligation, it might be better to decline. Consider whether the person asking is truly important to you or if the request aligns with your passions and beliefs.

You're Being Used

Some people are expert manipulators, always in a crisis and looking for someone to solve their problems. If you feel like someone is taking advantage of your kindness and using you, it's time to firmly say no.

You Get a Bad Feeling

Trust your intuition. If you have a negative gut reaction to a request, it's often a sign that you should say no. Many successful people attribute their success to listening to their intuition.

You're Not Excited

If you're not enthusiastic about a social invitation, business opportunity, or even a new relationship, it's usually best to say no. Your time is valuable, so don't settle for anything less than awesome.

You Feel Uncomfortable

If you're asked to do something that makes you feel uncomfortable, it's a clear sign that you should say no. Take a moment to pause and listen to your intuition.

You're Overloaded

It's important to set boundaries and say no when you're feeling overloaded with work or other commitments. This is particularly relevant in the current work climate, where remote work and the impact of COVID-19 have led to longer working hours and increased workloads.

The Request Crosses Your Personal Boundaries

It's crucial to stand up for your boundaries and say no when someone asks you to do something that makes you uncomfortable or crosses a line for you.

You're Only Saying Yes to Please Someone Else

While it's natural to want to please others, it shouldn't be your only motivation for taking on a task. If saying yes comes at the cost of your happiness and well-being, it's not worth it.

Tips for Saying No

• Be direct and assertive: Use a clear and decisive "no," without making excuses or mincing words.
• Keep it short and sweet: You don't need to provide a lengthy explanation or get drawn into a long discussion. A simple "No, I can't" is often enough.
• Practice: The more you practice saying no, the easier it will become. Start small and gradually build up your assertiveness.
• Communicate clearly: Be clear and confident in your decision to decline. Avoid appearing unsure, as this may make it harder for others to respect your choice.
• Express gratitude: Thank the person for asking, even if you're declining the request. This shows that you appreciate their position.
• Be respectful: Remember that not everyone is trying to take advantage of you. They may just be in need of assistance. Communicate your refusal respectfully.
• Don't beat around the bush: Opt for a straightforward approach instead of providing long-winded explanations.

Remember, saying no is an important part of setting healthy boundaries and focusing on what's truly important to you. It's okay to prioritise your time and energy for your own well-being.

Frequently asked questions