Should Friends And Family Handle Your Investments?

Should Friends And Family Handle Your Investments?

                                                                                         by: Brendan Magee

We all like to do business with people we like and trust and who do we trust more than good friends and family? They aren't going to do anything to hurt us or our family, especially when they are handling something as important as our retirement money or the kid's college fund, right?

Along with this high level of trust comes a bias that can also be dangerous to our financial security. Because of our loyalty or close ties to our friend or family member we may not be as quick, or blinded all together, to see or confront some pretty big red flags when it comes to our investments.Let me give you a couple of examples of this.

Helen is the owner of a very successful marketing firm. She is in her late fifties so she is getting close to retirement and is looking forward in the next few years to becoming a doting grandmother. She recently told me that a good friend was doing a great job of handling her investments. I asked her how much she was paying to have her money managed, and she said all she pays is about one percent on the amount of money she has invested with her advisor. She told me she sees the amount she pays on her investment statements she receives quarterly.

Then I asked her how much does she pay when the funds her advisor has invested in makes a trade. She looked at me with a blank stare. She had no idea that beyond the advisor's fee, she was subject to paying any other fees. So how does Helen determine whether or not she is getting value for what she is paying? At present she can't. I would bet you, if Helen, went into a restaurant and ordered a meal she would know,based on the menu, what she should be paying. I bet if there was a mistake on the bill she would bring it to the waiters attention and have the bill adjusted. When it comes to her investments, why is it that she has become so less vigilant?

Another couple, very smart and  highly educated professionals, John and Tina, spoke with me about their investments. They were disappointed with their returns over the past few years. They were doing business with a cousin. They felt like with the market having done so well over the past few years, they should have been doing a lot better.

My first question was, had they gone to their cousin and let him know that they were disappointed with their returns? John and Tina said they were reluctant to do that. They were concerned about hurting somebody's feelings. They had even secretly gone to another planner to see if he could offer any other solutions, but couldn't go with him because of the family dynamics.

 I asked them a few questions to see how sound their investment decision making process was. I asked if they were aware of the warning signs that they were engaged in or were allowing someone to engage in gambling and speculation with their money versus prudently investing it. John wasn't sure about the answer, and Tina was was quick to say that that sounded like an underhanded way of investing money and that she didn't believe her cousin would engage in that sort of behavior. She didn't really even want to entertain the possibility.

So neither John nor Tina have a grasp of the differences between gambling and prudent investing, nor, more importantly, do they have the ability to verify whether or not their advisor is investing their money or gambling and speculating with it. This being in the dark about how their money is or isn't being managed may be coming from a lack of knowledge, but you can't ignore that there is lack of desire to confront the possibility and deal with the consequences of finding out their cousin might not be the person to have handling their investments. If they were dealing with someone who wasn't a friend or family member would they be so willing to  be in the dark about what is going on with their investments?

The unfortunate thing for John, Tina, and Helen is that there could be untold damage being done to their investments and their American Dreams could be in real jeopardy. At the root cause of their problem is blind faith in their advisors because they are dealing with close friends and family members. Their financial security is taking a back seat to their loyalty to friends and the desire to keep peace in the family.

The problem is that investors are human beings and human beings make decisions and act emotionally. I do not believe investors have enough  appreciation for just how strong their emotions are. Therefore, there is no awareness how quickly their emotions can subtly over power what they know to be the prudent things to do or not do. The only way to deal with this phenomenon is to admit how powerless you are in dealing with their emotions and make sure they have a coach  empowered with the ability to tell them when their emotions are getting the better of them.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail brendan@coachgee.com.