I had just done up a quarterly review of our Bedokian Portfolio, which typically includes a (very) short briefing to my stakeholders (namely my spouse) on the transactions, portfolio performance and goings-on for the past three months. It is also during this time that I distributed the dividend and interest payments received over the past quarter to the respective stakeholders’ share of the portfolio. As you can see, our Bedokian Portfolio is not just solely mine, but also made up of funds from my spouse and my kids.
It is easy to manage an investment portfolio if the monies inside are 100% yours, but it gets a little bit tricky where you are managing not just your own but other people’s monies, too. By “other people”, I meant close family members, so please do not go around and ask your friends, acquaintances or even strangers whom you just met on the train to manage their investments; it is not right, legally and ethically.
Back to topic, for our Bedokian Portfolio, the share of and contributions into it are recorded and segregated according to each of our family members who have a stake in it, yet when it comes to investment decisions and actions (such as buying and selling of securities in the portfolio), these funds are viewed as a common pool. This allows easy management and also ensure that returns and risks are borne equally across based on each family member’s proportion of it.
The above would work if your family members have the same risk appetite as yours and agreed that there would be one person making the investment call. Trust is paramount here. For our case, I would still discuss with my spouse before making a buy/sell decision.
If you are interested in setting up an investment portfolio with monies from your family members, here are some guidelines that I am using which may help you:
Guideline #1: Agreement And Consensus
Even though the contributors to the investment portfolio are close family members, agreement and consensus must be reached before putting in the first dollar. Of course, the notion of “come on, everyone is family, no need for such things” cannot go wrong, but when crisis times hit such as a falling market, things will start to get ugly. To make it more formalized and watertight, come out with a written agreement to reduce misunderstandings and disputes (I did not do this though). In a family-managed portfolio, it is advisable to have only one, or the most two, members calling the shots, taking the role(s) of fund manager or co-fund manager, respectively.
If the expectations of returns and/or risk appetites among the family members are not similar and aligned in the first place, then it is prudent not to initiate the joint portfolio at all. I had seen and heard of real-life couples and families with each member having their own investment portfolio and not pooled with one another’s due to differing returns expectations and risk profiles.
Guideline #2: Disclosure And Discussion
It is very important to be transparent on everything; family members whom they are, but when it comes to money and funds, everyone will have an interest in it. As I had shared above for our case, at the end of every quarter, I will provide a brief summary on portfolio matters, and at the end of the year, I will share on the recent quarter and the year in general.
It is at this juncture you may want to open up questions and suggestions from the portfolio members after the briefing. Such sessions must be constructive, and not of trivial stuff (unless they are held over coffee or dinner). Things like looking at a particular region/country/sector/industry, some upcoming new securities, or even alternative, cheaper brokerages can be discussed.
Guideline #3: Contributions And Payouts
As the portfolio’s funds are a pooled resource, we need to have proper procedure on this aspect. Recognition of each member’s share of the portfolio is important and must be right up to the nearest cent. Contribution wise, to prevent the issue of time in the money (e.g., “my money is in the portfolio longer than yours, why my payout is lesser?”), a periodic injection is recommended.
While handling payouts, it is best to ask the members if they wished to have an accumulating (reinvesting of dividends/interests) or distributing (receiving dividends/interest in cash) at the get-go. Either way, calculation to the last cent is crucial so as to ensure fairness to all, and if there are instances where rounding has to be done, it is better to state upfront how this is to be handled.
The best time in my opinion to have contributions and distributing payouts would be during the aforementioned briefing sessions in #2 (which I had also stated in my opening paragraph). That is where everyone is around and things can get done on the spot (there is always Paynow), so there is lesser room for arguments.
The above guidelines are, in my opinion, equitable from the point of stakeholders and portfolio administration. As usual of my guidelines, it is not set in stone, and feel free to modify to suit your situations as you deem fit.