Imagine you grew up with Bob, or went to college with him, or became friends since he moved next door to you or joined your place of worship 10 years ago. He seems to be a smart, stable and successful guy, who has done well as a financial advisor.
Now, he’s hinting at – or outright asking to – manage your investment portfolio. Maybe you’re not happy with your current advisor and happen to be looking for a fresh start. So, the timing could seem fortuitous.
Or it could be ruinous.
Bob, or Sharon, or any other financial advisor who’s also a friend or family member could be the wrong choice to handle your money – no matter how successful they are with other people’s money.
We’ve written before about the role friends and family should play in managing your portfolio. Generally speaking and in a word, the role should be “none.” If you hire Bob or Sharon, and the market tanks, are you comfortable having the hard conversations about your portfolio’s poor performance? Would you dissect their responses and just rely on the trust that got them your business in the first place?
In the simplest terms, would you be comfortable firing them – and then losing their friendship forever. It’s rarely as simple as it was in the Godfather, when Robert Duvall, the family consigliere, tells Sonny, “This is business. It’s not personal.” Fire a friend and see how quickly business becomes personal, or how sour the next meal is. Rest assured, if you fire them, it will turn ugly. When you next see them in the neighbourhood, family gatherings, at your house of worship, will you – or they – be comfortable shaking hands, giving a hug, having a drink?
Hiring a friend or family member to be your financial advisor removes or at least weakens the one card you should always hold in this engagement; The freedom to fire them.
When you hire a friend or family, you’re relinquishing more than control. Because it’s personal, you may attribute your portfolio’s slide to poor market performance and accept your advisor’s explanations for what might have been their mistakes or oversights. You’ll be less likely to pay close attention and pushback. You expect them to have your back to a higher degree than they might have for some other client. You might even expect perfection. Would you even question their calls, motives or results? Think of all the “friends” and family members who got duped by Bernie Madoff.
Equally important is to watch out for financial advisors who buddy up with you. I’ve seen colleagues in the banking and investment world get close with high net worth individuals and spend weekends at their cottage or fly in their jet. Sometimes I question their motives. There’s a reason many corporations have rules about patronage, collusion or gifting, or simply requiring they keep relationships at “arm’s length.” If something goes wrong, there could be legal or financial liability. At the very least, ethics may come into question.
The nature of these relationships usually stripped bare in a market meltdown. In bull markets, every advisor is a hero. In bear markets, bad decisions become more apparent. You want an advisor whose calls you can question, not some thin-skinned individual who will take offense. And you don’t want a “yes man” who won’t push back on your pick that turns out to be a lousy call. It’s important to have rapport with your advisor, to be able to talk about your stocks – and your alma mater’s or local sports team’s chances. But if you can’t make that hard call, you’re paying for a friend, not a professional.
You’re paying for their stewardship. Maybe you also need a steward for the steward, a third party who can audit your advisor. We’ve written about auditing your advisors and keeping an eye on the family office. There are so many places where things can go wrong – with decision making, their role as a fiduciary, even breaching professional ethics. For one client who for close to a decade was being billed by their “advisor-friend” for management fees on unmanaged accounts. When I was asked to review the accounts, I pointed out the unnecessary charges. The advisor agreed in their oversight and issued a refund after a hard conversation.
One possible exception for the role of a friend or family member is as a co-trustee on your estate or a protector. They can be an advisor, ensuring the executor or other trustee is following your clients’ wishes. Ideally, however, they can be devoid of emotions or compensation for the decisions made. They’d be there just to lend an objective eye.
So, if you’re considering hiring that friend, family member or fellow gym member or congregant to manage your finances, ask yourself, will it be fortuitous – or potentially ruinous. If you need counsel on your decision, seek out an independent advisor who won’t stand to gain from your decision, but who can help make the hard call.