I Trusted A Family Member With My Investments (Now He Wants A Cut)

7 min

•May 5, 202625 days ago

Summary

A caller seeks advice on a $10,000 investment managed by his uncle using a 2-and-20 fee structure with a 10% hurdle rate. The hosts strongly advise against the arrangement, explaining that such fees are excessive compared to industry standards and that mixing family relationships with money management creates unnecessary risk and conflict.

Insights

Fee structures for DIY family investment arrangements often far exceed industry standards (1-2% AUM), creating unfair compensation expectations
Lack of transparency and understanding in informal investment agreements creates legal and relational liability that outweighs potential returns
Investors should never commit capital to strategies they cannot fully explain or understand, regardless of family relationships or past performance
Consolidating finances with a licensed professional eliminates relational entanglement and provides legal protection that informal arrangements cannot offer
Family members offering investment services without proper licensing or regulatory oversight expose investors to unrecoverable losses with no legal recourse

Trends

Growing prevalence of informal investment clubs and DIY portfolio management among non-professionals seeking to monetize financial knowledgeMisalignment between family investors' fee expectations and actual market-rate compensation for asset management servicesIncreased risk of unregulated investment schemes operating through family networks without proper disclosure or compliance frameworksConsumer confusion about appropriate fee structures and lack of awareness regarding industry-standard AUM pricing modelsRelational friction emerging from undocumented or vaguely defined investment agreements within family structures

Topics

Fee structures for investment management (2-and-20 vs. 1% AUM standard)Family money entanglement and relational riskUnregulated investment arrangements and legal liabilityCovered call strategies and portfolio complexityAsset Under Management (AUM) fee modelsInvestment advisor licensing and regulatory requirementsDIY investor services and informal investment clubsHurdle rate structures in performance-based compensationS&P 500 index fund investingBrokerage platform selection (E-Trade, Fidelity, Vanguard)Financial advisor selection and due diligenceInvestment transparency and investor understandingConsolidation of financial accounts and professional managementRisk management in family financial arrangementsIndex fund performance vs. active management

Companies

E-Trade

Mentioned as the brokerage platform through which the uncle manages the caller's $10,000 investment account

Fidelity

Referenced as an example of a legitimate, regulated brokerage platform for investment management

Vanguard

Referenced as an example of a legitimate, regulated brokerage platform for investment management

Northwestern Mutual

Mentioned as an example of a company whose salespeople sometimes misrepresent life insurance as investment management

People

Dan

Caller seeking advice on $10,000 investment managed by his uncle with disputed fee structure

Quotes

"This is highway robbery. The standard in the industry is around a 1% AUM fee. That's assets under management. Sometimes it's one and a quarter, maybe upwards of two in a crazy scenario. And he wants 10%."

Host•Early in call

"Never put your money in something you don't understand. So you've got to figure out what he's doing."

Host•Mid-call

"I would untangle this whole deal. It just you know the whole money family minutiae it not it just never really ends up good."

Host•Advice segment

"If he gets real upset, that's a good clue that this was a bad idea to begin with."

Host•Exit strategy discussion

"You just put it in an index fund and you'll probably be getting, I would think, the same returns as what he's doing, honestly. It's not better."

Host•Final recommendation

Full Transcript

Brought to you by the EveryDollar app. Start budgeting for free today. So I have some money that a couple years ago I put in with a family member who had some investment stuff that he was doing and it's not a huge part of like my savings or anything but it's just a little bit and I guess it wasn't really worked out in the initial agreement like what his cut of the money was going to be as he managed the investments and so we're working on that now and what was mentioned to me was like a 2 and 20 structure with like a 10% hurdle. So like we get the first 10% and then anything above that, like he would get 20%, but then somebody else mentioned the 25%. And to me, that's a 25% number. Is he a financial advisor or is this some back alley deal? He's just a family member who talked to some finance people and worked out some investment thing and he's been doing that and making pretty good money. Dude, this is sketchy all around. What kind of investment is it? Is it in the market, like index funds or mutual funds? Yeah, it's based on the S&P 500 for the most part. This is highway robbery. The standard in the industry is around a 1% AUM fee. That's assets under management. Sometimes it's one and a quarter, maybe upwards of two in a crazy scenario. And he wants 10%. But 20%? Yeah, that's just anything above 10%. But like anything above the 10%, like if we make over 10% profit on the year, he gets 25% of anything over that. As you should, though. Does he work for an actual like registered investment advisor like an actual firm No You keep saying like well he got some guys like he like a middleman and he I would get your money away from this guy asap who this family man is it an actual like like a cousin a brother uh yeah an uncle if he not like running it through anybody else he handled it all himself but it's just something that okay so he's a diy investor and he's just offering his services to you for a steep fee uh i mean we haven't really agreed on the fee yet What happens if he loses all your money? I lose that money, but it's not a huge part of my life. How much are we talking? How much have you given him so far? It's only $10,000. Okay, so what I would probably do, Dan, when did you give him this money to invest? About two and a half years ago. Okay. How old is he? 40. And does he do this regularly? Is this a side? He had been working on it with his own money for a while before he opened it up to anybody else. And again, is he using a Fidelity or a Vanguard? Does he have a brokerage? Yeah, it's through a brokerage. I think it's E-Trade maybe. Okay, so basically it's something you could be doing because he's not really moving money around, is he? He just picked an investment and put it in. But you'd be better off just doing this with an actual professional who's licensed. Right, okay. So how much money did you originally put in two and a half years ago? I put 10 grand in two and a half years ago. It's up to like 15 grand now. Okay. I was going to say, I was like, if it's still at 10 grand, this guy needs to go to prison. I mean, what? I mean the market has done really well the last few years Yeah So number one I would untangle this whole deal It just you know the whole money family minutiae it not it just never really ends up good. So I would just say, hey, bro, I just want our relationship to be clear of any level of entanglement when it comes to money. I just, I'm starting not to feel great about it. You've done nothing wrong. I freely chose to do this but I've been reading some books doing some stuff and I just think are you married? Yes. Me and my wife we've been looking at our entire financial picture and so we're going to kind of consolidate some stuff move things around so I probably will just cash out with you and move on that's what I would do and not even worry about it but if you feel like you can't do that and all of it then I would charge him what the average market rate is if you had an investment professional look at that which is 1% Or just say, hey, my wife and I, we decided we're going to work with an actual financial advisor at XYZ Firm, and we're going to move our money over there. Yep. And if he gets real upset, that's a good clue that this was a bad idea to begin with. Okay. But I'm glad you are at least up right now. Hurdles and 20% is crazy. Usually this call ends with, and all the money's gone, and I can't get in touch with him. Now, that would be weird. Would that not be crazy, Dan, if you went and told him that? But it sounds like he likes this stuff and he does DIY and he came up with some deal that was like, all right, I'll make a little bit of money to manage this for you. I don't even know if this is legal. This sounds crazy. I think it's kind of set up like an investment club type thing. So it mostly fine I have input into it But yeah Well why don you just do it Dan Well I don know exactly what it is Like I don know how to do whatever it is he doing He's not just putting it in a stock and leaving it. He's doing like some covered call type stuff, I think. Oh boy. Okay. There's, there's some more risk here. I personally, I would jump on a Ramsey solutions.com, click on smart investor pro and you'll sleep better at night knowing that all this money can disappear. Cause here's the thing. He could lose it all and you have no stake in the game. You can't come after him. And the fact you can't explain what he's doing, never put your money in something you don't understand. So you've got to figure out what he's doing. Okay. Just for your own sake, Dan, don't give someone 10 grand and be like, I don't really understand what he's doing, but he kind of knows what he's doing. You don't even know if you know what he's doing. Did he make any promises? Was he like, hey, man, I'll double your money? No, no, nothing like that. I mean, he gave up, like, yeah, he just said it was doing pretty well for him and he'd been making, I don't remember what the percentage was that he said at the time, but it was a decent amount. And I was like, okay, I'm not going to put all my money there, but I have some I can put there. Sure. That's fine. Yeah. Well, at least you're not too late. Hopefully we talked you off the ledge to get out of this weird situation. And it's always a family member. That's the part that I'm glad at least it wasn't a whole life insurance thing where he's like, he said he's managing my money, and it's really just a life insurance salesperson who works at Northwestern who sucked you into this deal. Totally. Yep. Yeah, it could be totally fine, Dan. We may be being dramatic, but from the relational aspect, I would not. Yeah, I just want to commingle money and family. I'd rather be a stranger I can yell at. You just put it in an index fund and you'll probably be getting, I would think, the same returns as what he's doing, honestly. It's not better. Create your free every dollar budget today. The simplest way to budget for your life.