Managing friends' money

[SharperDingaan]

The issue with this is expectations - and their management.

Simply because each friend is at a different level, with a different risk tolerance, and a different degree of financial discipline. Ultimately, how many different people are you trying to be?, and what is the 'exit' plan? - if there even is one. 'Cause todays financial advice often turns into holding limited P/A's, partnerships, etc. as time moves on.

 

Most just need financial counselling, not an investment vehicle (stock/bond).

If you have 10K in credit card debt, WTF are you doing investing? versus just paying it off immediately. The friends really need a course in basic financial management, and a MENTOR; not investment tips. Your involvement? $100 fee + lunch/coffee to review their finances once every two years, and write them a plan.

 

Once you can run there are other possibilities - but learn how to walk first.

 

Good luck!

 

SD

 

 

 

 

 

 

[Gregmal]

I'd also add that the 6/7/63 licenses are only needed if you wish to buy/sell securities for a client and get paid a commission or sales fee. In order to do this you must also be sponsored by a BD. This is probably not necessary within the context of what the OP was asking.

 

A 65/66 license is, if anything what you want into order to be able to charge a wrap fee or an annual advisory fee. Profit sharing, in any event, typically cant occur unless the assets of the client are at least $1M. Meaning they are likely accredited, in which case, just form a private partnership where you dont need any license as the relationship is exempt.

 

But even in all those cases, if you are dealing with friends/family, you most likely dont need any of the above to begin with.

[mccole72]

It sounds like the OP has rich tech friends in the Bay Area, not friends in $10k of credit card debt. Though of course anyone still in credit card or student debt should be focused on paying those off before investing. Also one of the best pieces of financial advice for young people is simply to buy a used reliable car, not a $35k car when you have a $70k salary or worse.

 

For said tech friends, wouldn't the most critical investment advice be in the form of optimizing their 401ks, stock based compensation, startup equity, etc., rather than trying to beat the market by a couple % in their IRAs? Or maybe I'm incorrectly assuming that they're young and haven't accumulated much wealth yet

 

Gregmal is right, Series 7 is to trade securities for commission, you would want a Series 65. But it's important to consider whether you're ready to manage money, as rb pointed out. Everyone always says that managing OPM is very very different from managing your own money, and I certainly believe it

[Libs]

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.

 

 

I ran it by Parsad and he likes the idea. He'll have it up and running with the new site in January.

[Jurgis]

For said tech friends, wouldn't the most critical investment advice be in the form of optimizing their 401ks, stock based compensation, startup equity, etc., rather than trying to beat the market by a couple % in their IRAs? Or maybe I'm incorrectly assuming that they're young and haven't accumulated much wealth yet

 

This very likely. Handholding for 401ks, ESPPs, tax planning, asset balance, etc.

 

I know it's cliche that good financial advisor is someone who does holistic work for client's financial situation covering all the areas. But IMO that's exactly what most people need - and not the CoBF "beat the market maybe" investment manager. But hey that's way harder work and probably requires way more skillz. And may take more time and effort and won't be cost efficient for not HNWIs. Unless you do it out of friendship and willing to help.

 

And yeah a lot of people ask for TSLA tips or "double my money stat" tips rather what they should be doing with their 401k.  ::)

[D33pV4lue]

I tell most of my friends to keep 6-12 months in the bank and invest the rest of the index, buy on dips and pullbacks, and forget about it. I don't have an objection to managing family/friend's money but just like clients, you have to make sure that they understand what you are getting them into and set realistic expectations.

 

Most of the questions have come from friends recently since the start of the pandemic and the market meltdown in February. The conversation usually starts with friends asking for me tips. I flip it and get a sense of what they are doing currently and what they own. Almost every single person has told me they are day trading Bio-Tech, jumping on momentum trades, and playing earnings. I then usually proceeded to tell them that I don't that and I invest for the long-term and what I do is pretty boring but is more about preserving and growing capital than short term trades.

 

Most friends gloss over at this point as they think they are smarter and can make money easier doing what they have been doing the last 6 months. Market historic rebound, IMO, has given most people the impression that stocks only go up and that it's so easy you should just do it yourself, heck last week my barber was giving me stock tips. At the end of the day, I just try to get them to realize that what they are doing is risking buying stocks you see from someone online without doing any research rarely ends up well. I don't want to see them lose money but I do think the music stops at some point and people that are doing this will get hurt.

[K2SO]

One thing I learned never to do is to give anyone a stock tip. It's really a no-win situation. I'm not going to remember who I recommended a stock to, and get in touch with them when I think it's time to sell. (And this assumes that I have any special insight into this, timing sales is one of the hardest things to do in this business). And if I say buy and it goes down, what if I change my mind and take a loss? What if I double down? How responsible am I to update this "tip" I gave my friend/family member.

 

I make sure to speak in generalities, such as "there are some Canadian dividend stocks that are attractive right now."

 

As far as having friends and family as clients, I generally prefer not to. As recently as this spring I had a tense exchange with a friend who is also a client who was

a) upset that I didn't protect capital adequately in the drop and

b) upset that I didn't buy more aggressively when everything bounced back.

 

Frankly he was by far my worst client in terms of handling the volatility and if it was anyone else I probably would have asked him to move his assets elsewhere.

 

It puts a strain on relationships, which should be a refuge from your work.  Up to you to decide if the AUM is worth the trouble.

 

[Gregmal]

One thing I learned never to do is to give anyone a stock tip. It's really a no-win situation. I'm not going to remember who I recommended a stock to, and get in touch with them when I think it's time to sell. (And this assumes that I have any special insight into this, timing sales is one of the hardest things to do in this business). And if I say buy and it goes down, what if I change my mind and take a loss? What if I double down? How responsible am I to update this "tip" I gave my friend/family member.

 

I make sure to speak in generalities, such as "there are some Canadian dividend stocks that are attractive right now."

 

As far as having friends and family as clients, I generally prefer not to. As recently as this spring I had a tense exchange with a friend who is also a client who was

a) upset that I didn't protect capital adequately in the drop and

b) upset that I didn't buy more aggressively when everything bounced back.

 

Frankly he was by far my worst client in terms of handling the volatility and if it was anyone else I probably would have asked him to move his assets elsewhere.

 

It puts a strain on relationships, which should be a refuge from your work.  Up to you to decide if the AUM is worth the trouble.

 

LOL. This is so true and not limited to just friends and family. Its why I dont take new clients anymore and why existing and any potential future investment is solely under the condition that theres either a PPM with lockup and vehicle to operate from, or an existing long term relationship, IE 5+ years already in place.

 

90% of people do the opposite of what you should do during periods of great opportunity. And then once the opportunity has passed almost all of them want to know why they didnt partake in it.....Its so infuriating and early on I had this issue a lot which is why I more or less switched to full discretion and the understanding that you could be constructive in criticism but the second we stop having a productive relationship or the second I'm being second guessed...your shit gets sold and your money gets wired back. Just not worth it.

 

I have an old friend/business partner who still actively runs a FS brokerage biz. Classic story from March-April goes something like "super HNW guy who has a self directed but advisor assisted account. He's been speculating like mad for years and is big on the options and margin. March declines and he starts getting skittish. Gets margin calls and refuses to add money because "we haven't hit the bottom yet"...gets stopped out and still won't make new investments because he's not comfortable doing so yet and wishes he had been advised to go short the whole market in February. In September he is furious because "we should have been buying in March and April, not selling", and "real soon" he's sending a ton of money for some options because "he needs to take control of the account now"....  I have no doubts about how that relationship will end... When things are good its "me" and occasionally "we" and when things are bad its "you"...

[jobyts]

My friends right now I talked are like, "I have more or less of a million or two in the 401K/IRA across a few different accounts. I'm really interested in you managing the accounts. Please give me a week or two, by the time I can figure out the login/password details of the accounts. I was/am too busy with the other stuff (startups), haven't logged in for a long time".

 

It sounds like the OP has rich tech friends in the Bay Area, not friends in $10k of credit card debt. Though of course anyone still in credit card or student debt should be focused on paying those off before investing. Also one of the best pieces of financial advice for young people is simply to buy a used reliable car, not a $35k car when you have a $70k salary or worse.

 

For said tech friends, wouldn't the most critical investment advice be in the form of optimizing their 401ks, stock based compensation, startup equity, etc., rather than trying to beat the market by a couple % in their IRAs? Or maybe I'm incorrectly assuming that they're young and haven't accumulated much wealth yet

 

Gregmal is right, Series 7 is to trade securities for commission, you would want a Series 65. But it's important to consider whether you're ready to manage money, as rb pointed out. Everyone always says that managing OPM is very very different from managing your own money, and I certainly believe it

[jobyts]

Thanks for the feedback. What I tell people is, I track some investment gurus who align with my investment philosophy. (high quality, with existing or potential pricing power, in industries with TAM much higher 10 years after than today). Since I do not have the in depth modelling of all the possible outcomes of each of the companies in my portfolio, I will be doing an equal weighted portfolio with 25-35 stocks. So all the promise I'm making is that I will not screw up. Treat it as an index, which could beat the market in the long run."

 

Almost certainly I will not go into a full time money management business. From couple of my friends' friends, I am fully aware of the fact that it is a very high stress job (especially if the aim is to meet the monthly/quarterly expectations of the clients). Interested in clearing the tests, just to avoid the possibility of SEC knocking at my door.

 

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.

[K2SO]

One thing I learned never to do is to give anyone a stock tip. It's really a no-win situation. I'm not going to remember who I recommended a stock to, and get in touch with them when I think it's time to sell. (And this assumes that I have any special insight into this, timing sales is one of the hardest things to do in this business). And if I say buy and it goes down, what if I change my mind and take a loss? What if I double down? How responsible am I to update this "tip" I gave my friend/family member.

 

I make sure to speak in generalities, such as "there are some Canadian dividend stocks that are attractive right now."

 

As far as having friends and family as clients, I generally prefer not to. As recently as this spring I had a tense exchange with a friend who is also a client who was

a) upset that I didn't protect capital adequately in the drop and

b) upset that I didn't buy more aggressively when everything bounced back.

 

Frankly he was by far my worst client in terms of handling the volatility and if it was anyone else I probably would have asked him to move his assets elsewhere.

 

It puts a strain on relationships, which should be a refuge from your work.  Up to you to decide if the AUM is worth the trouble.

 

LOL. This is so true and not limited to just friends and family. Its why I dont take new clients anymore and why existing and any potential future investment is solely under the condition that theres either a PPM with lockup and vehicle to operate from, or an existing long term relationship, IE 5+ years already in place.

 

90% of people do the opposite of what you should do during periods of great opportunity. And then once the opportunity has passed almost all of them want to know why they didnt partake in it.....Its so infuriating and early on I had this issue a lot which is why I more or less switched to full discretion and the understanding that you could be constructive in criticism but the second we stop having a productive relationship or the second I'm being second guessed...your shit gets sold and your money gets wired back. Just not worth it.

 

I have an old friend/business partner who still actively runs a FS brokerage biz. Classic story from March-April goes something like "super HNW guy who has a self directed but advisor assisted account. He's been speculating like mad for years and is big on the options and margin. March declines and he starts getting skittish. Gets margin calls and refuses to add money because "we haven't hit the bottom yet"...gets stopped out and still won't make new investments because he's not comfortable doing so yet and wishes he had been advised to go short the whole market in February. In September he is furious because "we should have been buying in March and April, not selling", and "real soon" he's sending a ton of money for some options because "he needs to take control of the account now"....  I have no doubts about how that relationship will end... When things are good its "me" and occasionally "we" and when things are bad its "you"...

 

It's absolutely true. I've been doing this since the late 90's and it's amazing how you can tell the bottom just by the clients begging you to sell everything... and less reliably you know things are getting near a top when they're asking you to take on more risk.

 

It's bad enough with arm's length clients, who you can end a relationship with fairly easily. But when it's friends and family it's a different matter altogether.

 

[jobyts]

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.

 

While going through some of the Series 65 material, my understanding is that the 15 client/25M AUM limitation was before the Dodd-Frank Act in 2010. After the Dodd-Frank Act, I do not see any number of client limitation or AUM restriction, as long as you do not get a compensation (on the books).

 

--------------------

From https://www.sec.gov/about/offices/oia/oia_investman/rplaze-042012.pdf,

 

Who is an Investment Adviser?

A. Definition of Investment Adviser

Section 202(a)(11) of the Act defines an investment adviser as any person or firm

that:

 for compensation;

 is engaged in the business of;

 providing advice to others or issuing reports or analyses regarding securities.

--------------------

 

So it looks like, as long as we do not charge any official compensation, you are excluded from the definition of an IA, so there is no need to register with the state or SEC. Please correct me if my interpretation is incorrect.

[Gregmal]

That is my understanding. Basically everything w/ FINRA comes down to compensation and the offshoots of it. Disclosure, conflict of interest, ethical dealing, etc.

 

That said, the 65 is easy and it probably costs $20k or so to setup an IA operation. If you are running more than 15 accounts you are likely well over $1M in AUM which should generate enough to make the official setup a worthwhile expense. There's a few things in the biz that you always want to remember. The first is CYA. If you're getting paid under the table you still have to file a tax return. If you file a tax return accurately a regulator has you dead to rights. They catch you doing shit improperly and they'll have no qualms about banning you for life. If its a wealthy Uncle who want to throw you 2/20 for his personal account, sure. But once you're dealing with multiple accounts always do it by the book. One bullshit customer complaint will do you in otherwise. And believe me, Ive met a ton of scumbags in the biz, but even the genuine and honest folks...it doesnt take much to run into issues with customer complaints. Buy a stock that goes down and all of a sudden they get amnesia and it was a UT, have one bad year after many good and all of a sudden the fees are unacceptable. Always protect yourself. The license and the RIA/IA status will help with that.

[bilo]

Interesting question.  A few thoughts:

 

I recomend that you go through the process and create a form ADV and brochure.  It will help to set expectations on both sides and prevent confusion.

 

You need to check with your local regulator.  My state does not allow "friends and family" advisors to receive compensation (perhaps that is everywhere? I don't even know).

 

Take time to know the customer and never take any risk that is not appropriate for their situation.  And dollar size of the account can't be used as shorthand for "conservative".

 

For examle, $25K might be nothing to some, for others it is their safety net if they lose their job.  Obviously, you don't want to be investing that money for someone in equity - that will be "scared money" and it will almost certainly end poorly. 

 

If you have rich friend/family that want you to manage "pocket change" for them, that is likely a low risk situation - but you still want clarity on both sides about objectives and expectations (which form ADV brochure provides) 

 

It sounds like your program is diversified/quality equity, which relative to other equity strategies some might do here ( focused micro cap, etc ) might be considered low(er) risk.  However, the strategy will still get wacked during a major correction.  So you need to look at if that person's equity allocation to your strategy is appropriate for their financial situation. 

 

IBKR's platform is excellent for a small business, as others have said. 

 

In other words, treat it like a real business where you have a fiduciary responsibility.  If that doesn't make sense or is not worth the time, I'd not get involved in it. 

 

 

 

 

 

[Edward]

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,

Some background and my 2 cents based on personal experience.

 

I have been managing money for others starting in 2008-9 when a few acquaintances asked me to in a similar manner. By then I have been managing my own money for several years. In 2011 I transitioned all clients into a fund and not accepting separate portfolios to manage. It is much easier and simpler.

 

I would only manage money for people if it was as part of building a record for yourself as an investment professional. If it is just casual, don't do it. If someone wants me to manage his money and he is not a good fit for being a long term investor in the fund, I tell him to put all excess money into Berkshire (I do not trust indexing). I also tell him that after he does that he will become curious as to what exactly Berkshire is, so I also send him the link to the annual letters. Works wonders really with some people, but most just leave me alone and buy real estate or something.

 

Regarding managing money for friends and family, it can be a very good or a very bad idea. You have to spend some thought on how to manage the relationship.

 

Personally I recognise that with family it's different, so I do it on the condition they don't ask any questions other maybe once a year asking how much they have, and I also have their funds (my brother's and my grandmother's) on my own name in trust. With friends I treat them as normal clients - Annual report once a year, etc.

 

Anyone that asks too many non-constructive questions or behaves erratically, I fire. Meaning they get their money back. I do not deal with clients that get jumpy if the market drops 30%.

 

In April, I had one withdrawal that was not related to the downturn (a previously planned real estate transaction), and two clients added more. Almost nobody called to ask how the portfolio is doing. It's a long term game for most and they just don't care as they see performance as my problem to worry about and not theirs. As a result I have a relaxed experience and can get some results (we are up 50% YTD).

 

So it can be a pleasure or a nightmare depending primarily on you. If you do not manage client relationships properly it will end badly.

 

 

 

 

[Rod]

 

Anyone that asks too many non-constructive questions or behaves erratically, I fire. Meaning they get their money back. I do not deal with clients that get jumpy if the market drops 30%.

 

 

This is key. You want clients who act like passengers in an airplane. They don't go running to question the pilot if they encounter turbulence. They operate on complete trust. I have two immediate family members who's money I've managed for 20 years. And it's going extremely well for everyone involved because they are hands-off and trust me implicitly.

[jobyts]

That is my understanding. Basically everything w/ FINRA comes down to compensation and the offshoots of it. Disclosure, conflict of interest, ethical dealing, etc.

 

That said, the 65 is easy and it probably costs $20k or so to setup an IA operation. If you are running more than 15 accounts you are likely well over $1M in AUM which should generate enough to make the official setup a worthwhile expense. There's a few things in the biz that you always want to remember. The first is CYA. If you're getting paid under the table you still have to file a tax return. If you file a tax return accurately a regulator has you dead to rights. They catch you doing shit improperly and they'll have no qualms about banning you for life. If its a wealthy Uncle who want to throw you 2/20 for his personal account, sure. But once you're dealing with multiple accounts always do it by the book. One bullshit customer complaint will do you in otherwise. And believe me, Ive met a ton of scumbags in the biz, but even the genuine and honest folks...it doesnt take much to run into issues with customer complaints. Buy a stock that goes down and all of a sudden they get amnesia and it was a UT, have one bad year after many good and all of a sudden the fees are unacceptable. Always protect yourself. The license and the RIA/IA status will help with that.

 

Thanks for your input. That's the conclusion I was reaching too. I admit, it was tempting to dream about the no-tax money you make. But messing with the law is like riding a tiger. Can't get down without either SEC or me, one of us is going to be dead. Also, don't want to lead a lifestyle that doesn't make myself or my kids proud.