Starting a Friends and Family Investment Fund or Club

starting a friends and family investment fund

Increasing your family’s wealth and cementing their future is a priority of many wealthy families around the world. Having a friends and family investment fund is the perfect way of achieving that goal.

What is a Friends and Family Investment Fund?

A friends and family investment club can take many forms. The first relevant factor is what you are all going to be investing in. It might be a startup or business/es, or it might be in stocks, shares, or other financial assets.

Beyond that, the principles are fairly similar. The basic principle is that you all pool your investments so that you can have a collective interest in an asset that you all agree is likely to increase in value over the coming years.

Getting an investment strategy, purpose, and goals

Before starting the investment club, investing in businesses and talking to friends about the fund, you will need to take a step back and see what the goals of the family and friends are.

If the main purpose of the fund is to simply preserve the wealth the family currently has while also growing for future generations. Some family members and friends might not understand that the higher the returns, the higher the risks.

An individual will need to take the family’s background into consideration in regards to long-term growth, generational wealth and collaboration, and community outreach for example. Once these have been established, the organizer is able to go on to the next step.

Some families and friends like to include their shared values and social responsibility into the fund. For example, some families will have social and environmental benchmarks they would like to meet. This may include not investing in companies that engage in deforestation or not doing business with companies that are engaged in unethical behavior.

Having a vision for the fund is an important part of having a family and friends fund because after all, its purpose is to grow wealth. By having a vision set in place, you are able to include the vision into their wealth growth and preservation.

The family’s risk should also align with their overall goals, vision, and future plans for the fund. Elements such as risk tolerance, risk exposure, and the ability to incur losses need to be agreed upon by everyone, and everyone who is invested in the fund needs to be comfortable with the level of risk and potential reward.

When starting a friends and family investment fund, the typical goal to invest with long term planning in mind, which is where determining the time horizon comes into play. Long-term planning will need to be reflected in the investment style, such as businesses to invest in and what sectors to acquire equity in.

The first steps of a family fund

The very first step that will be required before considering starting a fund is having a pitch deck, which is essentially a plan for investors on what their funds are going to do. The pitch deck will include all of the aspects of the fund, from club rules, and future investments to the repayment terms. It will also include strategies, financial projections, and what the future holds for the fund.

Although you are working with individuals whose you have a personal relationship with and who have trust in you, it is vital that before the fund is started, a pitch deck is made for all of the individuals who are interested in investing, whether they are acquaintances, friends and family. Having a plan for the funds that are invested would not only give the investors an understanding of what the future holds but also an outline for you as well.

Investing someone else’s money is a tremendous task to take on, especially when family is involved. An individual will need to have the required education, certification, and of course, experience to manage the investment. The individual will most likely need to have been involved in a financial role beforehand and knows the ins and outs of a fund.

Raising the funds needed

Before opening the fund, you will need to contact your friends, family members, and close acquaintances for fundraising. Part of raising capital is having a business plan that investors are able to understand so that all of the individuals are on the same page.

After you have raised the startup funds, you will be ready to start your own investment club with the money that was raised. The first step would be to have a meeting with an experienced lawyer who specializes in investments to form the partnership agreement and structure the fund in a way that will allow the fund to meet business goals and have the best tax implications for the fund.

Making sure you are staying within the law

Regardless of the size of the investments, the Securities and Exchange Commission (SEC) will be involved as state and federal securities laws will need to be followed due to the risk involved when investing. It is vital that all of the documents in this step are set up properly, ensuring the success of the fund for years to come.

The impact of not properly setting up a fund can be tremendously expensive, especially when there is a significant amount to be invested. The fund can miss out on potential investments, returns, and possibly severe government fines.

A qualified attorney is able to guide you into the structure in of the fund. For example, the crowdfunding exemption under Title III of the JOBS Act provides an exemption for receiving investments from large pools of investors but in relatively small amounts. This can be beneficial when trying to raise money from close friends, family members and acquaintances.

The SEC the main regulatory body that regulates financial markets in the United States. The fund will need to adhere to all of the laws and regulations put forth by the SEC and this is where an investment lawyer comes in. This is more true if the investment group is planning on accepting investor capital from outside of the family.

Depending on the type of investment club you are aiming to create, you can open the fund for outside investors as well, such as angel investors and institutional investors. Many families choose to keep their fund for family investments only and others will allow professional investors later on once the fund has been established.

Should you have a limited liability company for your fund?

As with all companies and funds, the money is not in a simple brokerage account with the manager logging in everyday and doing a few trades. It is much more complex than that. Some families choose to have an LLC, which stands for limited liability company.

The reason why an LLC is made for the fund is it makes an entity for the fund. It becomes a separate company if you will in which the financials are separated from the family’s personal financials. The entity (the family fund in this case) will be subject to different regulations and have its own employer identification number, allowing the fund to pay its taxes and possibly hire employees if it grows to a certain size.

The main reason investment managers choose to incorporate into an LLC or other entities is to separate the financials of the company and the family members who have invested into the fund. The LLC lays the groundwork for all matters that may concern the fund, from what to do with more resources and business decisions.

This comes in handy if the business fails and there are creditors or other family members who are looking to take matters to court for example. An LLC protects individuals from many possible problems that may arise as a result of bad financial management, lump sum payments, and creditors.

What About a C Corp?

Although the most common type of family fund structure is the LLC, some families opt to have a C corp. While an LLC offers the family fund many benefits, the C corp offers different benefits. Depending on the state and city the family fund in located in, changing an existing family fund LLC into a C corp can yield beneficial tax implications and the C corp would allow the fund to partially or fully deduct all of its expenses for example.

Terms of Business

It is also around this time that you should start writing the provisions and bylaws. This can include an incredibly wide range of obligations and contracts that cover many different scenarios. For example, they could, but are not limited to cover repayment terms, interest rates, total amount of future investors, rates, amounts, and contingency plans for various events that may or may not happen.

The provisions and bylaws may include some odd requirements and contingencies, but rest assured, they are there for a reason. They ensure that whatever happens to the individuals who are involved in the fund, the investors, and everything else has a plan. Many family clubs have run into problems with the courts due to situations that were not covered in the bylaws of the fund.

The laws, regulations and benefits of having an LLC or a C corp would also depend on the state in which the entity is formed in. It is highly advisable to entrust an attorney who has experience in money management and corporate entities. An experienced attorney is able to create the entire framework for the future and its success. And if the deck is excellent, the attorney might also be an angel investor!

Facing reality with potential losses

As with all investments, there are some risks involved. This is one aspect of having a family fund that can be a tough subject to tackle on as the entire purpose of the fund is to create wealth for the family, not to lose it.

Individuals who are looking to start a fund will need to let their family members understand that no matter what an individual’s track record may be, there is always a potential for losses.

The potential losses can be more than just money when involving family members and acquaintances. If the fund incurs losses, the relationship with other family members can be damaged, strained or not exist. Family members may also start asking for their money back or may ask you to refund their losses. No matter the outcome, the relationship with a family member can remain strained for years to come.

Stock club Vs Investing club: What is the difference?

There may be some confusion over the terms of stock club and investment club. The truth is many individuals use the terms interchangeably and both mean the same thing. Both are investment clubs that have people that are interested in learning about investing and the stock market in order to invest their own money.

What to invest in

What type of investments to make on behalf of the family fund is the main question. There are an incredible number of ways a fund management company can invest the capital under management. Many experienced fund managers will already have a financial strategy in place before even starting the fund and will have a detailed strategy and road map in the business plan.

Investment directors will typically focus on one or a few sectors or industries to invest in, such as tech stocks, real estate, or bonds for example. This would sometimes depend on what the investment director has specialized in.

The investment direction the fund takes on is mainly reliant on the opinions expressed by the family and the desired financial return they are looking for. Investment styles can have a broad range, from low-risk government bonds to very high-risk startups Such as a hedge fund or private equity fund.

Alternative investments

Historically speaking, many family and friend funds have only invested in traditional market products, market equity, and securities. That is, however, changing with alternative investments becoming more prominent. More and more families are starting to invest in this sector due to its growth and future potential.

Alternative investments are anything that is not a traditional investment. Examples of alternative investments are gold, art, and collectible items such as historical vehicles. Investment clubs are becoming more involved in alternative investment as many markets are seeing appreciation that is greater than the stock market.

Dedicated team or a family team

When managing money for friends and family, it is important to have experience in managing others’ money. This may include education, certificates, knowledge, and experience. This is to ensure that the fund is able to generate returns from the family investments and other investor money if the fund chose to include them.

Dedicated team

Many families with family funds will typically have an entire team dedicated to managing the investments the family has made. The individuals can be full-time and part-time. They can vary greatly depending on the path the fund has taken but may include attorneys, CPAs, CFAs, receptionists, directors, and financial advisors. These individuals are selected for their set of skills which they use to help the family investments grow for years and decades to come.

The individuals will be highly educated and experienced and are able to make the best decisions on behalf of the family’s investment. Many of these individuals typically come from backgrounds that are rich in experience within the financial sector with a wide range of roles.

Family team

Some families may not like having a full-time team working with their hard-earned money and may prefer a more private way of managing the family’s money. There are many ways in which a family can manage their investments and will vary from one family to another. What some families may do is dedicate one individual who is the most experienced in financial topics and this individual will take the role of the financial manager.

Other families may have several members specializing in different areas of finance and this group of family members manages the fund on behalf of the others. They are able to allocate the money the way they see fit, find new investment opportunities, and keep the investments up to date. Although it may seem obvious, it is important to note that the chosen individuals will need to be experienced and educated in financials.

Many families assign the role of financial managers to individuals who may not fully understand financial markets and may end up with a loss.

What many families may do is have a brokerage account with an established financial company in which they hold the family’s wealth and manage it themselves. The individuals with the most financial experience will manage the fund or the investments the family investments.

Some families may have a significant amount of money invested in the fund and the roles at the fund are filled with family members who are experienced in finance. This is done to keep the fund private and to not let outsiders into the family business.

These types of funds are also the type to keep outside investors out and do not let anyone but friends and family to invest in the fund. The individual that is chosen will need to do it on their own account and are able to invest money wisely. A family member that is not too eager to perform the task at hand may run into problems. If the family chooses to manage the fund themselves, then they will need to allocate the various roles to different members, such as financial analyst, CPA, and vice president.

Once all of the money has been collected, the friends and family investments Can now be invested into the many different markets for investment returns. There is no right or wrong answer when it comes to who or how the money is managed. Investment clubs can choose any way they are the most comfortable with regardless of what is popular. Every family has its own unique circumstance and requires its own solution.

Investment committees

Larger and wealthier families may have an investment committee in their fund that may or may not be open to outsiders. The job of the committee can be broad depending on the fund, but they can outsource, manage professionals within the fund, help guide the path of the fund and monitor the financials of the fund.

Investment committees are able to provide the fund with alternative solutions, they will provide the families with reports regarding all aspects of the family’s business and

Robo advisors

Some families may not have individuals who are experienced in finance and may not have the means to have a fully dedicated team dedicated to future growth. Instead, they opt to use automated advisors for the investments. Simply put, a Robo advisor is a program that uses artificial intelligence to advise individuals on investments and to manage investments without the input of individuals. .

There are two categories of robo advisors, simple and comprehensive.

Simple Robo Advisors

Simple advisors simply create the outline of an investment portfolio. The organizer finishes a questionnaire and based on the input, the robo advisor is able to create an investor profile of the investor or in this case, the family fund.

Comprehensive Robo Advisor

The second category of robo advisor is comprehensive. This type of advisor is more complex and is able to use artificial intelligence and data to predict the market and overall trends.

Although they are much cheaper than hiring full teams of financial professionals, they do have some negatives about them, mainly, they are unable to fully comprehend the overall market and the lack of human input. The main benefit to them is that they are able to manage money without costing too much money and without having to manage the family’s money, saving the family time and money.

Opening the fund to outside investors

There are pros and cons to opening the fund to outside investors. One of the main benefits is the money the investors are able to invest in the investment club. The additional resources from outside investors can allow the family fund to take on additional investments in the stock market, hedge funds, and a newly formed company for example.

Some of the cons when allowing outside investors is that they may need to see financial statements and balance sheets that will allow them to gain enough confidence in the fund to start investing, as every investment has its own risks. Another aspect of including outside investors is that the fund may be open for more scrutiny by the government, depending on the path of the fund and the government.

Despite the negatives of opening the family fund to individuals outside of the family, many funds ultimately decide to do just that. Not only will the outside investors add value to the fund through investment ideas and gain wealth, but it will also allow the family members to gain additional wealth through additional information, data, and economies of scale. The more money that is in the fund, the more the fund can take on, allowing for greater returns and greater risks.

One thing that some families do is combine their money together. Many families that have capital and are looking to invest it combine forces for better returns, creating an investment club for both friends and family investments. There are many benefits of combing forces.

The reason why families might combine forces is that although they are able to see each other’s personal financial matters, they are both in similar positions business-wise, allowing them to invest in similar investments. One of the benefits is due to pooling their money together, they are able to achieve economies of scale when investing. They are able to take on larger positions in the market and take on bigger risks.

One of the main benefits of combing the resources of more than one family’s money is being able to hire their own staff to manage the money. Due to some families lacking enough resources to hire their own team of professionals, they are able to start a team when combing their money with others in an investment club.

With the combined forces, families are now able to acquire equity in a business, take on bigger risks and start investing in large corporations, giving them voting rights for example. The investment possibilities are endless when combing forces.

But the main benefit to joining forces is simply the start of an investment management office that is dedicated to managing the investment of all of the families, their investments, and all of the businesses they have invested in. The hiring of financial professionals is what sets apart the wealth of families.

When combining business of more than one family and friends, the families will be able to enjoy personal attention from the financial professionals, a tailored investment strategy if they choose, reduced services costs, better investing techniques and scope of investment. These are just a few of the benefits friends and family can see when combining their money together in an investing club.

Although the term family fund is typically used, they also go by investment clubs, family offices, and family wealth management. Regardless of the name used, the goal of the fund is the same: to create wealth for the families that are involved investment club. The families are also able to share ideas in regards to new opportunities, investments and potential start-ups that are still small businesses to invest in.

Conclusion

Wealth management can take many different paths, styles and investments. But ultimately, the main business of having a friends and family investment fund is growth and wealth preservation. These two are the most important factors to take into consideration when starting a fund for your friends and family.

Some families may open their fund to outside venture capitalists or families for more capital, better management or simply they are looking to expand. The path to starting a family fund can be quite difficult, long and complex. They are many different laws and regulations that pertain to starting a fund for the friend’s and family’s wealth. There are even more regulations once the fund is open to outside individuals.

Regardless of the amount of business the fund is doing, you will need to hire an attorney that is incredibly experienced in these matters and understands the benefits of not having any mistakes.

Many families and their friends with higher than average net worths have invested in a business, fund or equity stakes in companies around the world. The family fund is the cornerstone of all wealthy families diversification process.

The wealth fund created for wealthy families does not have a single template in which other families can simply copy. Each fund has its own unique challenges and circumstances and it’s not recommended to use an approach that is the most common. A tailored fund is the best

In summary, you will need to have an investment strategy, business plan, vision, regulations, incorporated into an LLC or C corp, contingency plans, financial personel, and of course a future plan.

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