Should You Invest for Your Family and Friends? 4 Options to Consider

"Can I give you money to invest for me?”

If you’ve had some success in the past with the stock market, or if you’ve talked about your regular retirement account contributions, it’s likely you’ve been asked this question by a friend or family member.

Inspired by your success, they may be hoping that you can help them grow their own money and reach their financial goals. 

Your loved ones likely view you as the go-to resource when it comes to money and investing.

Now:

While that’s a great reputation to have, pooling your money together or directly handling another person's investments can be risky.

Before you invest on behalf of family or friends, here’s what you should know so you can make an informed decision.

The Risks Involved

You have your loved ones’ best interest in mind, which is why it’s natural that you want to help them with their investments.

However, there are some serious considerations you should keep in mind before moving forward.

Your investments may not do well

With investing, there’s no guarantee that your money will grow.

Even if your investments have performed well in the past, that can change, especially if the stock market plummets. You could even end up losing money. 

The biggest fear:

If your investment choices don’t pan out, your loved ones could see their hard-earned savings depleted.

If they were depending on the money to buy a home, pay off debt, or retire in the near future, the loss could be devastating to them.

That issue could leave you feeling terribly guilty.

Your relationships could be hurt

If the investments don’t perform well, or if your family members or friends disagree with your investment choices, your relationship could be irrevocably damaged.

Money issues are a leading cause of stress in relationships, and if things don’t go as planned, your loved ones could hold it against you.

Your loved ones may not have realistic expectations

Many people don’t understand how investing works or they may have lofty expectations of regular, double-digit returns every year.

If your investments don’t meet those goals, your friends and family members could be seriously disappointed.

They may even second guess trusting you with their investments in the first place, straining your relationship.

Your loved ones could ask you to repay them

If they lose money on their investments when they trusted you to help them grow it, they might hold you responsible for the losses.

The worst part:

They could expect you to repay them what money was lost, even though experiencing losses is typical of investing.

That can mean having to pony up your own money to make them whole.

Or, if you don’t, they may resent you for it.

How to Invest for Your Family and Friends

If you have thought about investing with friends or family and have decided it makes sense for you despite the risks, there are four different ways to go about it. 

1. Suggest an investing club

If your family or friends really want your help, joining or starting an investment club is a great compromise.

You can invest your money with your loved ones, without taking on the responsibility of acting as an investment advisor.

With this approach, you pool your resources together in an official investment club and, as a group, vote to buy or sell investments. 

It’s important to know that investment clubs aren’t informal arrangements.

Instead:

They are legal partnerships or limited liability companies that maintain detailed accounting records and have rules.

For example, people are usually required to invest a lump-sum amount and continue to make monthly contributions as part of their membership.

There are typically monthly meetings where you gather together to discuss the group’s investments. Those meetings can be a great way to learn about investing and share ideas on how to manage your money. 

If you’re thinking of joining an existing club or starting your own, check with the National Association of Investors Corporation for information and support. The organization has extensive resources that may be useful to you. 

2. Create an LLC

If you have friends or family members who want to invest with you, consider creating a limited liability company (LLC) before you start buying any securities.

With an LLC, you’ll come up with an operating agreement that outlines what can and can’t be done in the LLC, making it a great option for pooled investments. 

For example, the operating agreement can define how money in the LLC will be invested. You may decide as a group to spread out your investments between stocks and bonds. The operating agreement will list what allocation you decide on, such as 60% stocks and 40% bonds. In addition, having an LLC protects your agreement and prevents members from selling their shares to outsiders. 

You can open an LLC on your own or through an online service. Once the LLC is in place, you can open up a brokerage account with it. 

However, you should keep in mind that opening and operating an LLC isn’t free.

In fact:

It can be pricey.

For example, LLCs in California that are classified as disregarded entities or as partnerships are subject to an $800 annual tax.

Take those fees into account before moving forward with your investments.

3. Put funds into your own account

With this approach, your friend or family member would give you money for you to invest in your own accounts on their behalf.

You’d invest it in your brokerage account, and split the gains or losses with them based on the percentage their investment made up of your total balance. 

Investing on a friend’s behalf by putting the money in your own brokerage account is simple and quick, but there are serious drawbacks to consider.

You’ll bear full responsibility for the tax implications of the investment. While your friend may agree to pay their share of the taxes, it would be difficult to enforce it if they back out.

And, if the investment loses money, your friend won’t be able to deduct the losses, which could be a significant hardship for them. 

Another thing to consider is gift taxes.

Depending on how much your friend gives you to invest, you could be on the hook for paying gift taxes, increasing your tax bill and costing you money at tax time. 

Instead, tell your friend or family member to open their own brokerage account that is completely separate from your own. 

4. Advice for your friends to use

Giving advice to your friends on how to invest may seem like an easy way to help them, but it could be illegal.

Investment professionals must have a federal license or be registered with the Securities and Exchange Commission. If your friend pays you for the advice you give, you could be breaking the law and could be in serious trouble.

Even if you don’t charge a fee, but offer advice for free, giving financial advice can be tricky.

If the investments fail, they could blame you for it, and it can cause long-lasting damage to your relationship.

Help Loved Ones Make Their Own Investment Decisions

Investing someone else’s money is a serious responsibility and one you might not be willing to take on.

If that’s the case, but you still want to help them get started, consider doing the following:

Talk about robo-advisors

If your friend or family member is new to investing, talk to them about robo-advisors.

With a robo-advisor, your friends can enter their current financial information, goals, and answer questions about their risk tolerance, and the platform will automatically invest for them and balance the portfolio based on that information.

It can be a great way for beginner investors to get started and get a diversified portfolio. 

Help them learn

If your loved ones want to become more involved in managing their own money, you can help them learn about general financial and investment topics.

As a seasoned investor, you can share some tips on what you’ve learned, including:

  • how to read a financial statement
  • the different types of investment accounts and securities 
  • how to buy and sell stocks
  • how to track the stock market’s performance

Show them how to find a financial advisor

For people who need more hand-holding, or who have more complex situations, talking with a reputable financial advisor can be invaluable.

Unfortunately, many people don’t know how to find one. 

You can help them locate a good advisor by focusing on ones who have certifications such as:

  • Certified Financial Planner
  • Personal Finance Specialist
  • Chartered Financial Analyst

Also look to see if the advisor is a member of The National Association of Personal Financial Advisors, a professional organization that requires members to complete continuing education courses.

Conclusion

Investing on behalf of friends or family may sound like a tempting idea, but it rarely ever works out.

Tread carefully!

Doing so poses serious risks to you, and offers few benefits.

Instead of pooling your money together, help your friends learn enough about investing that they feel confident doing it on their own, with a robo-advisor, or through a certified financial professional.

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