Advice and tips from a beginner who set out alone

Investing can make a rewarding hobby – but go carefully, especially if you’re managing others’ money too.

By day, Jamie Leinhardt, 29, is a telecommunications professional in Manchester. But come the evening, he turns into a stock trader extraordinaire – investing his own savings as well as those of his father with great success. Leinhardt uses online stockbrokers, where he invests in shares and investment trusts, mostly within individual savings accounts (Isas). He spends about 20 hours a week on what he views as one of his favourite hobbies. His portfolio returned 4.6% in 2016, 21.9% in 2015 and 13.4% in 2014.

Meanwhile, the portfolio he created for his father’s savings returned 0.7% in 2016, 21.9% in 2015 and 28.6% in 2014. “A couple of years ago I did some analysis into all of the Oeics and investment trusts available. Using around eight years’ worth of performance data, I looked at lots of different time periods and gave each fund my own score,” he says. “I was looking for the most consistent funds with the highest returns and I’ve used this data to choose which funds to invest in.”

When it comes to selecting shares, Leinhardt’s strategy has developed over time. “I mainly focus on smaller companies. I used to only look at fundamentals, looking at companies with good earnings growth compared to their price/earnings ratio. More recently I’ve factored in some technical analysis – looking at charts. Sometimes an interesting-looking chart will prompt me to do further research; I actually do a quick review of the chart for every single share on the stockmarket on a semi-regular basis, just to see if there are any potential opportunities.”

He currently invests in three investment trusts. As for individual shares, he tends “to hold around 20-25 shares at any one time, though it varies a little. Each will range from 1% of the portfolio to 10% depending on how confident I am. For my dad, there are around 10-15 shares, each no more than 10% of the portfolio,” adds Leinhardt. When asked what principles he has set out to invest his father’s money, he says: “Almost everything I buy, I’ll buy for both of us. I’m more cautious or risk averse when investing for my dad, so some of the more illiquid, higher-risk shares I only buy for myself. That’s why I have a larger number of holdings.”

How does he keep his father in the loop? “Every time I do a trade I send him the details so he can monitor the portfolio himself. I also keep a spreadsheet which I update monthly. It contains all of the transactions and calculates the monthly performance of each portfolio, so I also share these figures with him.” What about managing his dad’s expectations? “It’s very difficult… My dad understands that the market can fluctuate quite significantly, but that doesn’t stop him from questioning some of my decisions – but usually only after we’ve made a loss!”

You might be thinking that this sounds like a lot of responsibility to take on. And Leinhardt acknowledges that “there are very few advantages investing someone else’s money. If I make a bad decision for myself – it’s annoying. But if I make a bad decision for someone else, I end up feeling much more responsible. The only advantage is the sense of satisfaction when things go well – when you know you’ve done a good job.” Yet he’s far from alone.

As the number of DIY investors grows in the UK, so investing on behalf of others – family members and friends – is becoming more commonplace. Several investment platforms now allow investors to link accounts in order to view what the others invest in.

Jason Hollands, managing director of Tilney Bestinvest, says that around 8,000 users – around 17% of clients – currently opt for its linked account feature. The platform doesn’t charge any extra fees for doing so, but some other platforms have gone even further in encouraging pooled or jointly managed investments by discounting fees based on the overall amount invested.

Anyone can link accounts, providing they consent to do so. “This gives the linked party access to view their holdings, but not to manage the account like some form of unregulated fund manager: we do not allow people to deal on accounts that do not belong to them,” says Hollands. In most cases, account linking takes place between married couples, but sometimes it includes children. One client has ten such links. “In many families, there is often one person who takes a particular interest in investing, who might therefore guide the others in their decision making.”

On the AJ Bell platform, around 14,000 people (about 10%) have linked accounts. “Customers can choose for it to be view-only or dealing as well,” explains Charlie Musson of AJ Bell.
The linked person is unable to change the security details, or make withdrawals from the linked account. But linking accounts is not a decision to take lightly. Investors agree to accept any outcome that arises as a result of any act or omission by the account lead, says Musson, so permission should only be given to those they know very well and trust.

Taking charge of the family finances

So what do you need to consider if you intend to invest someone else’s money or ask someone else to invest yours? Firstly, private arrangements are unregulated: if you lose money, you will not be able to access the Financial Services Compensation Scheme. Kath Shimmin, a lawyer and partner, who leads the Banking and Finance Team at Blake Morgan, says that the only remedy in the case of a loss might be “to try to sue your friend or relative, but it might be very hard to make anything stick unless they have actually acted dishonestly”.

What about the regulatory or legal perspective on managing other people’s money? What are the red lines? Stephen Searle, a partner at law firm Clarke Willmott LLP where he manages the firms’ Financial Services Litigation team, says that as long as you are not doing it by way of business, there should be no regulatory issues. “

Broadly speaking this is unlikely to be the case if there is no remuneration involved.” Shimmin explains that the Financial Conduct Authority (the regulator) looks at the following factors to decide if an activity is by way of business: the degree of continuity (how often and for how many people?); the existence of a commercial element – are you being paid?; scale of the activity – are large numbers involved?; the amount of your time which the activity takes up, compared to other unregulated activities – ie, are you already in this business?: and the nature of the particular regulated activity that is carried on.

“You don’t have to meet all of the tests but the more boxes you tick, the less likely you are to be regarded as carrying on a regulated activity. So you could, for example, take a small fee for your services, if it were clear that you are not in the investment business and otherwise this is a one-off family arrangement limited to a small group of individuals,” explains Shimmin.

There are also the inevitable risks that go hand in hand with mixing money and close relationships. Before you let a friend or family member manage your money, discuss what the risks are and how much risk they’re willing to stomach. If you are the one doing the investing, you must set out a clear investment plan and stick to it. It is also a good idea to discuss performance on a regular basis to avoid surprises and manage unrealistic expectations. Think about writing down your arrangements, says Shimmin. It doesn’t have to be complicated or overly legal, but it will help you spot areas of difficulty and everyone will have a better idea where they stand if something goes wrong.