Diana Clement 's Opinion

Your Money and careers writer for the NZ Herald

Diana Clement: Want to own some shares? Join the club

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There are positives and pitfalls in pooling resources to invest in stocks

Most clubs are formed when a group of friends get together and agree to put in a fixed amount of money each month to buy shares. Photo / Getty Images
Most clubs are formed when a group of friends get together and agree to put in a fixed amount of money each month to buy shares. Photo / Getty Images

Anyone remember share clubs? They were hot in the 1980s, but were all but killed off by the 1987 stock market crash. Nonetheless small pockets of share clubs survive and their members both learn about investing and tuck away tidy profits.

Most clubs are formed when a group of friends or colleagues get together and agree to contribute a fixed amount of money each month, which is invested in shares.

Although share clubs aren't common, ASB Securities has seen a slight pickup in the numbers opening accounts, says managing principal Angela Busby. There are some very good reasons to join a share club.

As well as learning about investing, clubs offer a way to achieve diversification on a relatively small investment, says Busby. The cost of investment is lowered through pooling. On the downside, you are at risk of the investment decisions the group makes.

Clubs registered with ASB Securities come in three main flavours. At the bottom end are small clubs consisting of three to four people. There are also slightly bigger groups of family and friends and a growing number of larger more established partnerships and societies.

Some share clubs have been running for decades. One, the EPIC Investment Group share club, started 35 years ago when a group of Auckland City Council staff got together to invest. Over the years some EPIC members have left or died and new members from outside the council have joined. The age of members ranges from the 20s to 70s.

EPIC chairman Ross Warren says club members pay a minimum of $100 a month each into the club - although they can pay more if they choose.

The club's portfolio is worth more than $1.8 million and some of the individual members' holdings are valued at more than $100,000 - which shows how $25 a week can grow.

At monthly meetings in Grey Lynn members review the portfolio, get reports from their secretary and treasurer and read advice from their professional adviser.

As a result of years of investing many share clubs make tidy profits. The EPIC club returned about 10 per cent a year for years, says Warren. These days it's about 8 per cent.

On the downside, it's hard to beat the index. From a purely monetary point of view, drip feeding your $50 or $100 a month into an index or other managed fund might end up making you more. It's possible to do this with Smartshares funds, some of the offerings on the RaboDirect platform, or simply into your KiwiSaver.

Add to that the fact that a share club will almost certainly need to spend money on professionals and it starts to get more expensive than investing on your own.

On the other hand buying units in an index tracker or managed fund is not as interesting, fun, or educational as investing through a share club.

I don't want to put anyone off forming a share club. But it's a whole lot harder to set one up than it was in the 1980s. Then you could get together with a group, make a few informal rules and leap in boots and all.

These days there are laws with teeth that you need to beware of and the reality is that it's usually necessary to use the services of a lawyer, accountant, and possibly a financial adviser. Operating as an informal club could prove problematic if there's a dispute.

Sometimes it's easier to join an existing club than try to start one from scratch. At the EPIC club new members must buy 1000 units to get started, which costs about $8000.

If you do want to start a new club from scratch Busby recommends that clubs think carefully about the structure from the outset and seek advice - perhaps from another share club - to avoid common pitfalls.

Each club needs its own constitution and deed. The deed contains all the rules it will run by. Unless you can get a copy of a deed that you know is tried and tested then you will need to get a lawyer to draft one. EPIC's deed is 12 pages long.

The deed covers issues such as whether a unanimous or majority vote is needed to buy shares or make other decisions. Share clubs often need to supply their deed in order to open a share trading account.

Another issue is how you are going to own the shares. The easiest way, says accountant Terry Baucher of Baucher Consulting, is to have a simple partnership. Another option is to have a bare trust, with a professional trustee and club members being beneficiaries. In both cases the returns can be attributed for tax purposes to each shareholder according to their percentage ownership.

That brings me to the real elephant in the room when it comes to share clubs, which is tax. It's only natural for share clubs to want to buy and sell shares after every meeting. The trouble with this is that the Inland Revenue Department (IRD) could view it as trading and charge tax on the gains.

If that's not bad enough, the club being classified as a trader can automatically taint all of the members of the club and their other investments. This is not good.

The IRD provides very little guidance on the issue of trading, says Baucher. There is no hard and fast rule - such as if you make more than 20 trades in a year you are classified as a trader. It's all about "intention" he says. If you intend to trade the shares when you buy them - instead of buying to hold - you are a trader.

As a result it's really important to document meetings well. "The more ground work you do the clearer the tax position will be," says Baucher.

The experience of the EPIC club shows just how problematic these tax rules are. The club goes to "quite considerable lengths to avoid being classed as a trader", says Warren.

EPIC's largest holding currently is Auckland International Airport. The members agreed that they need to rebalance their holding. To do so they had to sell shares, which if not done correctly, could result in the club being accused of trading.

Another issue is that the club's rules need to cover what happens when someone wants to exit, says Baucher. Things happen in people's lives, such as marriage, children, divorce and death and they need out.

In the case of the EPIC club, withdrawals can't necessarily be paid out instantly.

"They have to apply for it and they can get a reasonable amount out at the next monthly meeting," says Warren. "It may be a couple of months before they can get the balance released."

It's not always possible, or sensible, to sell shares for such a withdrawal and sometimes they need to wait for cash funds to be available.

One big risk is that the club or members of it are seen as giving financial advice. If so, they could be in legal bother. The Financial Markets Authority tells me that share clubs need to be aware of the Securities Act 1978, Securities Regulations 2009, Financial Advisers Act 2008 and a couple of others.

One thing that is easier these days is tracking the share club's portfolio. It can be done online using either your broker's portfolio or with an independent share portfolio such as Sharesight. The advantage of using a service such as Sharesight's online portfolio is that you have real-time share prices, can calculate your returns exactly and all the information you need for tax returns - such as foreign investment fund (FIF) tax - is at your fingertips.

Sharesight's managing director, Tony Ryburn, says all members of the club can access the portfolio. Often clubs will choose to give members read-only access. Sharesight is free for up to 10 stocks. Over that there is a $25 monthly charge.

Finding advice and support for a share club in New Zealand isn't easy. It's worth visiting the Proshare.org.uk website or buying a manual from that site. But be aware that not all of the manual will be relevant because laws are different in that country.

- NZ Herald

Diana Clement

Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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