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A few of my friends showed interest in me managing a portion of their IRA money. I'm not someone with a financial education background. What qualifications/certifications I need to pass to legally manage other people's money?

I am a US citizen, residing in California.

 

Thanks,

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You can do off the books stuff, no issue just get creative. If you want something more official, IBKR has friends and family accounts where you can manage up to 15 accounts iirc, without any sort of license. Otherwise, you need either a 7/63 or a 65 and then a sponsor firm in order to conduct business.

 

I'd agree with the above though...business and friendship dont mix. I do some lightly, but I dont charge family members anything and close friends I just kind of tell them what to do and how to do it themselves. That way between them listening to me, and then executing whatever it is they seek to do, they have a little bit of time to think it over.

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I will not comment on your actual question about the legal framework.  But, I would note that business and friendships often do not mix well.  I have always taken a hard pass on managing money for friends and family.

 

 

SJ

I have had the opposite experience. Worked out very well. It's just like with regular clients. Pick the right ones, work hard, and treat them well. Everybody's happy. I do say no a lot though.

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I'd agree with the above though...business and friendship dont mix. I do some lightly, but I dont charge family members anything and close friends I just kind of tell them what to do and how to do it themselves. That way between them listening to me, and then executing whatever it is they seek to do, they have a little bit of time to think it over.

 

I agree. What's the upside of managing their money? Surely you can envisage the downside.

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Just to throw something different out.

 

You know squat about this, there's no real upside, and it is unlikely to end well. Of course there are exceptions, but the manager almost always has deep experience/expertise in it.

 

Far smarter to look at the fintech platforms, find something that makes sense to all of you, and put your money there. It's modern, will give all of you very good experience, and if the investment blows up - your friends will not be blaming you.

 

Different strokes.

 

SD

 

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Any upside you can make off your family and friends you can make off of building a real customer base. I get what you are saying, but its basically just a roundabout form of a handout. And yes, I know plenty of silver spooners who breezed through life, went to name brand schools, and then were "given" assets by family to earn a living off of without ever holding down a real job or gaining experience in the field. Wouldn't one rather build something real on their own? Without the risks of....best case scenario, freeloading off family, or at worst...blowing them up and being the moron at the dinner table every family gathering?

 

Theres nothing "wrong" with doing it, but its not a very asymmetric bet. If its not a form a freeloading, then do it for free...And if you're doing it for free, whats the upside?

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Any upside you can make off your family and friends you can make off of building a real customer base. I get what you are saying, but its basically just a roundabout form of a handout. And yes, I know plenty of silver spooners who breezed through life, went to name brand schools, and then were "given" assets by family to earn a living off of without ever holding down a real job or gaining experience in the field. Wouldn't one rather build something real on their own? Without the risks of....best case scenario, freeloading off family, or at worst...blowing them up and being the moron at the dinner table every family gathering?

 

Theres nothing "wrong" with doing it, but its not a very asymmetric bet. If its not a form a freeloading, then do it for free...And if you're doing it for free, whats the upside?

 

 

Actually, I've never had the "silver spoon" portfolio management issue.  In my case as an individual investor, it usually arises because you've been shooting out the lights for 5 years or 7 years and you make a careless comment after drinking a few beers, or somebody infers from your behaviour that you have been shooting out the lights.  The astute people who learn or infer that you have been shooting out the lights want to jump aboard the train and have you do the same thing for them with their $100k retirement account. 

 

The problem with all of this is the standard saw about "past performance does not guarantee the future," as well as the fact that the people on this board often end up with a very unconventional portfolio in their quest to shoot out the lights (if I am not mistaken, you have written on occasion on your unconventional portfolio concentration).  This can result in periods of under-performance (sometimes lengthy periods), and sometimes you incur permanent losses of capital.  The friend/family with his $100k retirement fund is rarely well suited from a mental and emotional perspective to the bad periods.

 

What is more, there will be periods where you will be doing perfectly fine by some metrics, but you will be doing much worse than the market high-fliers.  Your friend with the $100k retirement fund will look at AMZN and conclude that you have picked a bunch of duds simply because AMZN has risen by 66% in the past year and your selected portfolio hasn't done quite so well.

 

Either of these cases can be drivers of friction in the friendship or family relationship.  As others have suggested, if you are doing all of this for free, what is the upside?

 

 

SJ

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Never manage money for people who have less of it than you.

 

To address the original post - the most "legit" way is via RIA but this may be too formalized for your means. You can manage I think up to 15 friends/family accounts "informally".

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There's always two sides to this.

 

There are good/great investment managers who started from friends-and-family and did great. Hey, Buffett is one of these. ;)

 

There are good/great investment managers or just investors who never take friends-and-family money to avoid the issues that people describe.

 

You just have to know the pros/cons and where you fall in this divide. Either can work, either can fail or lead to problems.

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Agree with all that as well StubbleJumper. The understanding of the investment philosophy is easiest conveyed through the dreaded PPM or form ADV. Many times people skip these with "related parties" or when dealing with friends and family....they come to you because you are viewed as the guru and they are not; which lends itself to having a very limited understanding of the gig...and also leaves you dealing with what is likely an average person with an average understanding of the market...which by default is often something involving "get rich quick" and "gambling". I dont know too many normal folks who are ecstatic about the prospects of a steady 10-12% compounded annual return....I was talking a couple months ago with my brother in law and he brought up investments. He asked what I like right now, and of course the majority of the stuff I mentioned is boring, hard asset with next to no debt names that I told him I think should be able to do 15-20% annually for a while. He goes "what about Carvana? I bought some in an Acorns account and its up 80% in a few months"...exactly on point with your statement about relative performance and expectation.

 

Its just too messy over the long haul and unless you're desperate for a favor in the form of money and/or a job....youre better off taking your skills somewhere you can monetize them and cultivate business relationships without all the potential hazards.

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Agree with all that as well StubbleJumper. The understanding of the investment philosophy is easiest conveyed through the dreaded PPM or form ADV. Many times people skip these with "related parties" or when dealing with friends and family....they come to you because you are viewed as the guru and they are not; which lends itself to having a very limited understanding of the gig...and also leaves you dealing with what is likely an average person with an average understanding of the market...which by default is often something involving "get rich quick" and "gambling". I dont know too many normal folks who are ecstatic about the prospects of a steady 10-12% compounded annual return....I was talking a couple months ago with my brother in law and he brought up investments. He asked what I like right now, and of course the majority of the stuff I mentioned is boring, hard asset with next to no debt names that I told him I think should be able to do 15-20% annually for a while. He goes "what about Carvana? I bought some in an Acorns account and its up 80% in a few months"...exactly on point with your statement about relative performance and expectation.

 

Its just too messy over the long haul and unless you're desperate for a favor in the form of money and/or a job....youre better off taking your skills somewhere you can monetize them and cultivate business relationships without all the potential hazards.

 

this is funny, when people ask me for stock tips (who don't know much about investing), I tell them EQC (the most boring thing I own) and then whatever the most juicy option thing I own at the time is (CDR right now). I tell them, you'll probably put a small amount of money in ____ (super levered thing) and lose it all but it's a good gamble. No one ever asks more questions about EQC after a brief description.

 

EDIT: I also tell them to index

 

 

all that said, if i ever manager others' money in a professional fashion, it will be anchored by my and my immediate family and some friends...so I don't quite agree with the "don't mix family/friends" stuff.

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A few of my friends showed interest in me managing a portion of their IRA money. I'm not someone with a financial education background. What qualifications/certifications I need to pass to legally manage other people's money?

I am a US citizen, residing in California.

 

Thanks,

As others have said, the IB platform is useful for <15 friends and family accounts. I do this for a few of my friends, but mostly my own kids. I limit the accounts to around 5k and concentrate on odd lot tenders and the like. The accounts do well percentage-wise, but on a small base.

 

I'd have to agree with the prevailing sentiment, however...

 

What I have found over the years: managing money for others changes the process - like the Heisenberg uncertainty principle - the mere act of observing an event, changes the event. The feelings and emotional process of managing OPM is totally different than trading your own portfolio. As such, I heartily recommend going through the process in a small way to try it out before jumping into or considering full time money management.

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What I have found over the years: managing money for others changes the process - like the Heisenberg uncertainty principle - the mere act of observing an event, changes the event. The feelings and emotional process of managing OPM is totally different than trading your own portfolio. As such, I heartily recommend going through the process in a small way to try it out before jumping into or considering full time money management.

I second that. I'm definitely more careful with clients' money than my own.

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What I have found over the years: managing money for others changes the process - like the Heisenberg uncertainty principle - the mere act of observing an event, changes the event. The feelings and emotional process of managing OPM is totally different than trading your own portfolio. As such, I heartily recommend going through the process in a small way to try it out before jumping into or considering full time money management.

I second that. I'm definitely more careful with clients' money than my own.

 

Lots of great thoughts on a wickedly complicated topic with obvious benefits (for others) and large risks (for the manager).

 

As the years go by i have slowly been reducing my contact with family and close friends over money topics (like offering investment advice and stock picks). The main reason is i found it actually added another overlay into my investment decision process. And what i learned over time is this was not a good fit for me (the more complexity the worse the results).

 

A second reason is i find people want the reward and do not want to put in the work. What they want is pretty simple: tell them stocks to buy and when they go up then tell them when to sell. Rinse and repeat. Simple. But not realistic.

 

How you invest is probably a key input to this decision as well. If you are a ‘traditional’ type of investor with an easily explained investment process that you religiously follow then managing other peoples money might be pretty straight forward. My style is not ‘mainstream’. As one example, I like to concentrate my portfolio at times. This works for me (and i am ok with the risk/reward tradeoff) but would not work with other peoples money.

 

Best of luck :-)

 

PS: hat tip to those who are able to do this successfully

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Complex topic indeed.

 

1) I have a friend who clearly needed help, and would have been a good client (meaning she would have taken advice, had reasonable expectations, etc.) But ....SHE didn't want to do business we're friends. She then got burned by a scumbag broker who put her in annuities.

 

2) Some of my clients have become close friends over time. I'm quite comfortable with that. It just makes me want to do better for them.

 

3) Regarding the opposite of 2, though- - friends first, client next - for me it depends on the length and depth of the friendship. Example 1 was not a close, long-term friend. But if my close friends of 30 years asked me to manage their money, it would feel weird.

 

I trust my gut on these things. Also given example (1) I would refer them to someone I trust next time. Or at least try too.

 

Good topic. Maybe we should have a category for those of us who manage money - where we can commiserate and exchange ideas. For example, a thread on crazy client stories would be fun.

 

 

 

 

 

 

 

 

 

 

 

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Thank you guys for all the replies. Those are helpful.

 

Right now, the money I charge is very very minimal, it could cover some subscription costs. If things go well, I plan to do it in an elaborate way after clearing the qualification tests.

 

In bay area, there are lots of smart (in there own fields) intelligent rich engineers, who are financially so ignorant.

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Jobyts, I have been contemplating the same thing. I am in CA as well, and from what I can gather passing the Series 65 and forming an RIA seems to be the best route to manage OPM officially.

 

The bigger issue is deciding whether it's a good idea to manage friends/family money. I'm currently torn on this. I've had friends offer to pay me to help them with investing but have been hesitant so far. As people here have mentioned, it can be mutually beneficial so long as you work hard and add value, plus are honest and communicate effectively (Buffett pulled this off early in his career). But it can also be disastrous if you are wrong, especially with close friends and family.

 

What is frustrating about this is that for most people the alternatives are horrible. Without proper guidance they might just sit in cash forever, or open a Robinhood account and buy Zoom and Tesla, or get roped in by some Financial Advisor at Northwestern Mutual or Morgan Stanley or something who will charge them 1-2% to put them in high fee mutual funds. If those are the alternatives, then surely it is my moral duty to step in and at the very least guide them away from these paths, no?? And if I don't want to take them on as clients, my default advice would be to just invest in index funds. But there are many people who lack the confidence/knowledge/emotional stability to DIY index and would have sold half their investments on March 20, 2020. I think that as readers of this board, we forget what "average" financial prowess really looks like.

 

There's no perfect answer here. Damned if you do, damned if you don't...

 

 

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What is frustrating about this is that for most people the alternatives are horrible. Without proper guidance they might just sit in cash forever, or open a Robinhood account and buy Zoom and Tesla, or get roped in by some Financial Advisor at Northwestern Mutual or Morgan Stanley or something who will charge them 1-2% to put them in high fee mutual funds.

 

There's no perfect answer here. Damned if you do, damned if you don't...

 

Why are the alternatives horrible? The most straightforward alternative is to open an account with a reputable low cost asset manager like Fidelity or Schwab and cost average into low cost index funds like (SP500, QQQ or total stock market index). That’s easy to do for everyone.

If handholding is required, I think Fidelity and Schwab actually do a pretty good job with their advisors for a  relatively low fee. those are alternatives that I have and would advise my friends.

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What is frustrating about this is that for most people the alternatives are horrible. Without proper guidance they might just sit in cash forever, or open a Robinhood account and buy Zoom and Tesla, or get roped in by some Financial Advisor at Northwestern Mutual or Morgan Stanley or something who will charge them 1-2% to put them in high fee mutual funds.

 

There's no perfect answer here. Damned if you do, damned if you don't...

 

Why are the alternatives horrible? The most straightforward alternative is to open an account with a reputable low cost asset manager like Fidelity or Schwab and cost average into low cost index funds like (SP500, QQQ or total stock market index). That’s easy to do for everyone.

If handholding is required, I think Fidelity and Schwab actually do a pretty good job with their advisors for a  relatively low fee. those are alternatives that I have and would advise my friends.

 

I completely agree that low fee index funds at Fidelity or Schwab are perfectly reasonable and straightforward alternatives. I'm saying that it's frustrating that, even with those very reasonable alternatives out there, somehow people still get pulled into overpriced Advisors. I am constantly surprised to hear from smart and rational people who have their money managed by someone at MS or similar

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... There's no perfect answer here. Damned if you do, damned if you don't...

 

Certainly there is a perfect answer : Just don't! [You have to stay aware of, that the delusion is inside of own your head : "I want to change the world to a better place for all! [starting with my friends]" [,which is impossible for you to do]].

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Good topic. Maybe we should have a category for those of us who manage money - where we can commiserate and exchange ideas. For example, a thread on crazy client stories would be fun.

I think that's a swell idea.

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Some website (https://smartasset.com/financial-advisor/series-65)  says Series 65 license helps a financial professional to give investment advice. It does not license them to sell packages investment products or to buy and sell securities. To do that, you must get your Series 6 and Series 7 licenses.

 

So, to do the trading on behalf of them, I need to clear the Series 6 & 7? Whereas Series 65 license helps only to advice them what and when to buy/sell stocks, but they have to do the trading by themselves?

 

 

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Some website (https://smartasset.com/financial-advisor/series-65)  says Series 65 license helps a financial professional to give investment advice. It does not license them to sell packages investment products or to buy and sell securities. To do that, you must get your Series 6 and Series 7 licenses.

 

So, to do the trading on behalf of them, I need to clear the Series 6 & 7? Whereas Series 65 license helps only to advice them what and when to buy/sell stocks, but they have to do the trading by themselves?

Jobyts,

 

Please don't take this the wrong way and don't take it to hear because I suspect that you are well intentioned.

 

We have been debating here whether it is a smart thing for you or others to manage friends' money. I have previously said that I have had great result (though I've proceeded with great caution). Others have been steadfast against the idea. But if you need to ask an investment forum whether you need a series 6, 7 or 65 license to do it, I just don't think you're ready for it yet. I hope you take some time to consider that fact.

 

P.S There's an SEC exception for friends and family (it's been mentioned on the thread). You don't need a license. If they're ok with it you can blow them up as far as the SEC's concerned.

 

 

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