Key Person Risk – Beware of this Top DIY Investor Pitfall

Do-It-Yourself investors dominated headlines recently when intense demand from self-directed investors crashed the discount brokerage systems at some of Canada’s banks, including RBC and TD where investors found themselves unable to buy and sell stocks online. The story showed how powerful a force individual investors here in Canada are as they rushed to snap up stocks, particularly in the much-hyped marijuana industry.

As money managers, we get asked about DIY investing all the time — and we agree it can work for some people, especially if they enjoy tracking markets and investments, have the right skills and temperament — and can also handle the extra work and stress that comes along with managing your own money.

But there is one big risk when it comes to self-directed investing — and it’s one that many people often forget about.

Key person risk

Key person risk is something we talk about a lot when it comes to managing a business and corporate governance – but it also applies to your family finances. If you choose to manage your investments on your own, you need to make sure you have a backup plan in the event you get sick or are somehow incapacitated and no longer able to do the job. If your spouse is by your side helping you stay on top of the investing, that’s great – but what if they stop being able to help or simply don’t share that skill set or interest?

Entrepreneurs should know all about key person risk – after all, people who’ve build a successful business would never think of structuring their operations around any one individual including themselves. So it should come as no surprise that the same rule should apply to self-managed investments – you need to be thinking ahead and planning for scenarios when you’re no longer able to do the job due to illness, injury or even death.

If you are thinking of self-managing your investments, here are a few recommendations to help you avoid key person risk:  

1. Have a backup plan – Like a will or estate plan, you should have a contingency plan for your spouse to pick up the reins on your investments when you can’t. That should include all passwords to your accounts, a list of investments, and any other information about target asset weights or the strategy you’ve been following. Make sure your spouse knows where this is.
2. Have someone waiting in the wings – Another option would be to have a list of people you trust to help your spouse transition over to an asset manager.  That way your spouse can easily transition your finances over to a professional manager in the event s/he isn’t capable of taking over the job.  A caveat here – it needs to be the right person, who knows the investment business and how it works and can make good recommendations. That takes time and thought – and while your best friend might be smart, he or she might not be a good fit for your investments.   
3. Start derisking now – Even if you enjoy self-managing your money, you may wish to consider hiring a qualified financial advisor right now to manage at least some of your investments. That will let you test out a third party — and help your spouse get comfortable with someone else handling your portfolios.  Building a relationship with an advisor now simply makes the jump easier when and if you find yourself struggling to manage on your own.

Bottom line: While DIY investing can be fun and rewarding, you need to think ahead — and make sure you don’t leave your family unable to take over when you’re not there.