Investors, like off-duty medics, face an occupational hazard. Sooner or later someone will want to pick your brains. But while the poor doctor-at-leisure might be forced to look at a bad knee or a nasty rash, it will be your view of Bitcoin or a tiny tech company that the questioner is after rather than your verdict on spots or a sore leg.
For some investors, it doesn’t end at questions. If you are the sole investor in the family, you are quite likely to end up taking on the management of other family members’ money, starting with your spouse’s/partner’s, then your children’s and finally your parents’. You may even be asked to look after other relatives’ and friends’ portfolios, and you are also more likely than any non-investors in your circle to be appointed a trustee.
After all, you have the knowledge and the experience. You know your PEGs, your ROCEs and your tracking errors and you know your way around the markets. For anyone who doesn’t know where to start, let alone where they should be going, it makes perfect sense to leave the tricky job of investing their money in your hands.
Many of our readers manage portfolios on behalf of their spouses/partners and also their elderly parents – we see this frequently in submissions to our Portfolio Clinic – and it’s an arrangement that’s facilitated by most stockbrokers, although not Barclays (see Practical matters for attorneys).
While there are many efficiency and financial advantages to these informal arrangements – couples can achieve real diversity and holdings of a meaningful size while avoiding losses stemming from inexperience – there are also risks.
If the investor gets it wrong, losses could be doubled. There won’t be anyone to challenge their ideas and performance and there’ll be no one to complain to about it, either. Shrinking pots of money and misunderstandings about liquidity can cause bitter family arguments and rifts with friends, while funds managed under a proper power of attorney are vulnerable to mishandling and misuse.
For all these reasons, both parties to an arrangement (whether informal or formal donors and attorneys, or settlors and trustees) might be wise to thrash out a few issues first. We’re not suggesting that couples tie themselves up in red tape. Nothing of the sort. But in arrangements where objectives are not so intertwined/aligned, a frank discussion could prevent problems later on. Our ‘rules’ below for both informal and formal handovers of portfolio management focus on preventing mismanagement and abuse.
Informal arrangements between family members/friends
Donors should, obviously, choose someone they trust, and who knows what they are doing. A financially savvy relative or friend is not a regulated investment manager and, cautions Jason Hollands at Bestinvest, you will have no regulatory protection.
Make your objectives and your attitude to risk clear, and only invest money you can afford to lose. “Ultimately,” says Charlie Musson at AJ Bell, “if an investment loses value, the person will have to accept that because they have provided authority for the investor to trade on their behalf.”
If only for security reasons, make the effort to follow how your money is being invested and how it is performing and always choose your own passwords. Hargreaves Lansdown says that joint access to an account can be removed immediately if needed while Bestinvest recommends that passwords are never shared.
Remember that while the investor might be a skilled stockpicker, markets can go against them and you could still suffer financial loss.
If you’re the investor – the informal attorney – start by making sure the donor understands that while they are freeing themselves from the responsibility and burden of managing their own money, returns are not guaranteed. Are they investing money they can afford to lose? Because if they’re not, both of you could be in for a shock.
Agree the level of control – full or collaborative – and ascertain what the donor’s expectations are in terms of performance and updates. It’s vital that you understand what they are expecting and take their needs and objectives into account – you are investing for them, not you, and you need to know how much risk they are comfortable with, their investment objectives and how long they plan to stay invested or when they might need access to lump sums. Are they expecting an income stream? Do they want growth? Should dividends be reinvested? You might need to manage their money in a different way to how you manage yours, for example in a lower-risk way.
Alternatively, they might be perfectly happy for you to invest their money according to the strategy you use with your own money. In which case, explain your style. If you trade frequently, or take a contrarian approach, or normally concentrate on deep value situations, or high-risk minnows, say so and how this might impact performance and costs. Do you invest mostly in funds or shares? Do you invest across all sectors and all areas of the market?
Keep the donors informed. Spending time explaining your thinking and buy and sell decisions, along with performance analysis, can be rewarding for you both and help prepare the potential future managers (say a spouse or your children) of the portfolio(s).
You should highlight tax liabilities as a result of your investment successes for any money managed outside an individual savings account (Isa) or self-invested personal pension (Sipp) wrapper because your partner/relative/friend may need to complete an annual tax return.
The power of an attorney
As an investor you might find yourself being roped into managing money through a financial Lasting Power of Attorney (LPA), typically for an elderly parent. If you are a company director you might be asked to act as a business attorney for the owner or another partner of the business.
Financial LPAs are essential for anyone who lives to a ripe old age and for business owners who are often away and need someone to step in on a day-to-day basis, or worry about who would run the business (pay wages, order new stock and so on) if they were unable to do so for a period of time, putting the business at risk of collapsing. Even a spouse can be denied access to funds and accounts.
As an appointed attorney – whether for personal or business matters – you will have the right to manage the donor’s money and affairs and make decisions on their behalf.
Suzannah Farnell, a solicitor at Progeny Private Law, says she rarely puts a will in place without also setting up an LPA because the consequences of not having one if mental capacity is lost can be even more devastating than not having a will.
Entrepreneurs can register a financial LPA for each company they run, typically appointing a trusted colleague – for example, the finance director or managing director – or a family member as their attorney. “Usually this type of LPA will be registered by the donor upon completion so that it is fully effective immediately, enabling the attorney to stand in for the donor, under their direction if required,” says Ms Farnell.
But for all their advantages, financial LPAs, particularly those for personal affairs, have a flaw: they can easily be misused to benefit the attorney rather than the donor. Donors should therefore think about building in extra safeguards, and attorneys who would rather not be hauled before the Court of Protection should make themselves aware of the rules and follow them strictly – see our recommended reading list.
Golden rules for getting LPAs right
For the donors
Choose your attorney carefully – someone you are sure will act in your best interests and follow your wishes. For your business affairs you could appoint one of your children if they are old and experienced enough, or a director at the company – someone who knows as much about the business as you do. For your personal affairs this could be a son or daughter or other relative with whom you have a good relationship. If you appoint your spouse, you should also appoint a replacement attorney in case they are unable to act for you.
Children are an obvious choice for personal LPAs but one Court of Protection judge reckons they are also the most likely culprits for stealing from parents (which can be devastating for siblings, too). When they are alerted to it, the Court of Protection takes a dim view of children who spend their parents’ money on themselves once they’ve got the keys to it, and it has discharged attorneys who commit these types of offences, such as one son who charged his mother for the time he spent visiting her.
Nevertheless, it’s probably safe to assume your children are the best option. Note that the financial LPA can be set up so that you remain in full control of your affairs. Your attorney will simply have the right to act for you if you are not present or can no longer easily do things for yourself, but it won’t stop you managing your money exactly as before.
You can also block the LPA being used at all until the point where you have lost mental capacity. The document will then only be accepted by banks and other organisations when it is presented with a doctor’s certificate stating that you have lost mental capacity.
To reduce the risk of an attorney abusing their power and benefiting themselves, consider appointing joint attorneys. You can appoint two – or more – attorneys on a ‘joint’ basis, which means decisions have to be made unanimously. They won’t be allowed to make decisions on their own or spend money without the agreement of the other. Cheques, for example, will need both signatures. For this reason, joint power will probably only work if the attorneys live near each other. However, you can also appoint the attorneys on a ‘joint and several’ basis, which means each one is free to make decisions on their own without consulting the another. Nevertheless, there would be a second pair of eyes looking over bank statements and so on. Also, if you select this option you can add tweaks such as that certain decisions (for example, a sale of your home) can only be made jointly. For a business LPA, you can appoint a family member or a professional such as a solicitor as a second attorney, although for operational reasons it generally would only make sense to do this on a joint and several basis. The professional attorney will always work closely with the attorney “who has the working knowledge of the business”, says Ms Farnell.
If you are reluctant for whatever reason to choose a member of your family for either a personal or business LPA, say because your children have fallen out with you or with each other, or there is no one suitable, ready or willing to take on the role, you can choose to appoint a professional person such as a solicitor. This will mean extra expense on your estate, but at least a regulated, independent person will be acting for you.
If you do nothing (ie, you don’t create an LPA) and you lose mental capacity, your relative(s) will need to apply to the Court of Protection to be appointed as your deputy. As a deputy, their actions will be closely monitored by the Court and they will also be subject to spot checks, which you might find reassuring. But weigh against this that you could be dropping your family into a stressful, drawn-out, messy and financially difficult situation. They will be denied access to your bank accounts and other funds even if the money is needed urgently for care home fees or bills. Your family may have to pay for legal help with the application to be your deputy. You will have no control over who is appointed and what decisions they can or cannot make.
Remember that as long as you have mental capacity you can revoke an LPA and register a new one.
We mentioned that deputies are watched. Attorneys are not watched in the same way, but if you would prefer them to be, you can complete form LP3, which will notify a chosen person that the LPA is being registered. If you give a copy of your LPA to this family member or friend, they can monitor the attorney and will be aware of any restrictions or special instructions. For the arrangement to be fully effective, you can also specify in the LPA that your attorney must ‘report’ to another person – eg, supply them with a list of all spending and decisions at regular intervals.
In fact, anyone can report an attorney if they go beyond, or abuse, their authority or do something that’s not in your best interests
Consider the complexity of your affairs. In your personal life, if you plan to draw down from your pension or have a large portfolio, will the chosen attorney have the skills and experience to continue managing these? How do they manage their own money? If you think they will be out of their depth, then specify in your LPA that you wish a professional adviser/manager to be placed, or to remain, in charge of your investments.
You can put restrictions in the LPA – for example, you can state that your attorney must not make gifts and you might consider doing this to ensure there is enough left in your estate to enable the terms of your will to be carried out. For a business LPA you might insist that major business decisions should not be taken without the approval of a named third party. If your preferences are not stated clearly, or are unreasonable/impossible, they will probably be rejected by the Office of the Public Guardian (OPG), which is the body you’ll register the LPA with. The OPG, by the way, recommends the use of words such as ‘must’ and ‘have to’ when adding specific instructions.
Rules for attorneys
tasks such as paying bills, arranging insurance and completing tax returns to possibly managing large sums of money and agreeing new contracts. You will be in control as if you were the person you are acting for and so because of the potential for abuse, you are legally obliged to always act in the donor’s best interest, not your own or anyone else’s. So no dipping into the donor’s money to pay a child’s school fees because “it’s what they would have wanted”.
Gifts in particular are a tricky area – and a common reason behind attorneys ending up before the Court of Protection. “A £50 gift is fine,” says Brian Hummerston, a financial planner and director at Tilney, “but a £5,000 gift ‘because dad promised to buy me a conservatory’ is not.” And, he adds, giving the donor’s money away is not acting in their best interests: “It is the opposite.”
Basically, as an attorney you have limited powers to make gifts, although small gifts for birthday presents are fine. Even if the donor still has mental capacity and appears to agree with your decision, legally you do not have the right to make larger gifts – with one exception: gifts such as the £3,000 covered by the annual inheritance tax allowance can be made but only as long as:
- The person has a life expectancy of less than five years.
- Their estate is worth more than the nil rate band for inheritance tax (IHT).
- The donor approves or would have approved if they still had mental capacity.
- The gifts are easily affordable.
Gifts disguised as sensible financial management are not within your power. For example, if the donor’s house is available for renting, you might consider letting it to yourself or another family member on a reduced rent. This counts as a gift. The same applies if you are planning to sell the property to a relative below the true market value. Similarly, if you are contemplating a loan to your own business, to yourself or another family member from the donor’s funds. For all these ‘gifts’, you will need to ask the Court of Protection for its approval.
If unauthorised gifts or loans are made, the Public Guardian can involve the police, have you removed from your role and take legal action to recover the money.
Don’t exceed your authority. “An attorney does not have carte blanche to do what they like. The assets that have been placed in the care of the attorney still belong to the donor,” says Rebecca Goldring at Blick Rothenberg. Likewise, as an attorney for a business, your role is to act in the place of the owner and to respond and behave exactly as they would in the best interests of the company.
If the donor wishes to be involved and has the capacity to do so, you must allow this to happen. In any case, in every decision you should consider their wishes. If you are a joint attorney, and power has been awarded on a joint basis, you must make all decisions jointly.
Keep your money and the donor’s money in segregated accounts (unless you’ve always had a joint account).
Don’t expect payment, although you can claim for legitimate expenses. If you do make claims, you should keep receipts and invoice the donor.
Keep records of everything you spend and every decision you make with dates and reasons for the spending decisions. It’s your responsibility to make sure tax and other bills are correct and paid on time.
Being a Trustee
As a trustee of a trust fund, for example one that has been set up by a parent for children, your job is to follow the express wishes of the settlor (the parent) – and to achieve the objectives of the trust as outlined in the formal trust deeds. This might be to pay an income to the named beneficiaries. It is up to you to invest the funds in the trust, or to ensure that the existing assets are suitable, so that income and growth objectives can be achieved, and that rental income is collected where some of the assets are property holdings. You must not manage the trust in such a way that you will benefit unless you are also a beneficiary. You must avoid conflict between your interests and the beneficiaries’, and you must remain impartial to all the beneficiaries. You must ensure that the correct distributions are made.
Adult beneficiaries must be informed of their interest in the trust and supplied with the information they will need for their own tax returns.
HMRC should also be informed of the Trust’s existence. As a trustee you must ensure that tax is paid and tax liabilities reported to HMRC. Trusts are treated differently to individuals when it comes to tax, for example there is no dividend allowance for trusts and the capital gains tax (CGT) exempt amount is lower at just £5,850. The income tax and CGT rates applied will also depend on the circumstances in which the trust was set up and the type of trust structure used. The tax rate applied to income also depends on whether it is being accumulated within the trust or being paid out to beneficiaries. But where a trust is managed for a disabled person or a child under 18 whose parent has died, special rates of trust tax apply and you should complete HMRC’s Vulnerable Person Election Form. Trusts set up for vulnerable people get the full CGT exempt amount, currently £11,700 (but not in the year the beneficiary dies), and you claim this using another form, SA905.
Expenses incurred running the trust can be paid but you should not expect to be paid, although professional trustees will normally be paid.
Ms Farnell recommends that trustees aim to manage the fund in such a way that it is “enabling and empowering” and will enhance the beneficiaries’ lives. It’s important she says to build a good relationship with the beneficiaries by maintaining regular communication and explaining decisions.
Managing a portfolio as an attorney or Trustee
Taking over the management of a portfolio or a trust fund or setting one up from scratch with a view to achieving a particular goal, for example to pay care home fees or to provide for children, is quite a different task to managing one for yourself or for a family member where you have free rein and the aim is simply to make their money work harder.
Be risk averse – this isn’t your money or a ‘spare’ pot that can afford to be run down to nothing; it will be required to produce a steady income and/or capital growth, and you will need a strategy to achieve that. If care fees are being paid, or income needs to be paid out regularly, you should probably ditch riskier or some types of illiquid assets. Take into account the risk profile and age of the donor/beneficiaries when you set about making changes to, or choosing assets for, the portfolio. Certain investments such as emerging markets will not be appropriate if your aim is to preserve capital or where life expectancy is below five years.
Brian Hummerston at Tilney says when managing assets held in trust, a cash-flow plan can help illustrate how long the money will last and drive decision-making. “We would always show different scenarios based on a range of growth rates and risk levels. A cautious portfolio would generate maybe 2 to 3 per cent a year. A moderate portfolio would generate 4 to 5 per cent a year. Beyond that we would not go,” says Mr Hummerston.
You will need to maintain some cash reserves if only for regular spending requirements. But in some situations higher levels of cash might be appropriate. “Cash will be considered where life expectancy is very short – you have to remember not only the potential effects of volatility but also the costs of investing. We review life expectancy each time we review the portfolio,” says Mr Hummerston.
You will need to understand short- and long-term cash requirements and make sure you always have enough cash or near-cash investments on hand to fund them. Notice accounts may offer higher interest rates, but shouldn’t be used if that cash may be needed at short notice. And high cash balances should always be spread across multiple accounts with different banks – the Financial Services Compensation Scheme will cover a maximum of £85,000 per financial institution.
For example, high-yield shares can look tempting but can be a lethal trap (read The Deadly Sevens https://www.investorschronicle.co.uk/shares/2018/04/13/the-deadly-sevens/). It’s safer to focus on 'average' yields which, with capital growth, can add up to good total returns – and you can always generate cash by selling some shares that have risen in value.
Funds can help minimise trading costs, risks and the time you spend monitoring the portfolio.
Make use of Isa allowances and CGT exempt amounts. Note that CGT liabilities cease on the owner’s death, so it might not always be worth selling shares that have risen a lot in value.