Once you have a few successful trades under your belt, you might find that family or friends ask if you can make some money by trading securities for them.
Whether joking or not, the question may still be lurking in the back of your mind: “Could I trade stocks for someone else?”
This is such an important question to get right, so I’ve decided to provide a well-researched answer to keep you safe.
The Short Answer:
While the gears in your head are spinning, let me just state the answer in its simplest form:
You cannot trade securities for others without becoming licensed as an investment professional. Investment professionals must be registered with the Securities and Exchange Commission or have a federal license. There are few exceptions to this rule.
Of course, if you’re willing to jump through the necessary licensing hoops, it’s definitely possible. We’ll cover that today, as well as some pros and cons to consider before committing to that path.
To be clear, there are both legal and practical reasons why you shouldn’t trade for friends and family without getting certain licensing and registration first. Let’s look at those reasons, as well as what the path might look like for those who want to legally trade for others.
Legality Aside, Is Trading Stocks for Family and Friends a Good Idea?
Setting aside the legal issues for a moment, let’s just think about the practical issues that might arise if you trade on behalf of family and friends.
Even if you were able to get a return on your family members’ money, there are many details of the arrangement that you would need to iron out. It’s no secret that working through money or business issues with family can strain relationships. This alone is a significant reason to think twice.
Do you really want to have to field questions about portfolio performance at your Christmas Eve party?
And what happens if you actually lose your family or friends’ money? Talk about uncomfortable Christmas Eve parties, assuming you’re even invited! Money conflicts are one of the top sources of conflict in human relationships, so you should think long and hard before you make it more of a factor in your closest relationships.
Past Performance Does Not Guarantee Future Results
A research firm named Dalbar studies what results the average investor gets in the market and compares that to the market index. For decades, they have found that, due to poor timing choices, the average investor (even with investment advice) has significantly underperformed the markets over all the typical research time periods: 1 year, 5 years, 10 years, 20 years, and 30 years.
The most recently published annual data (for 2018) shows that the average stock investor not only lost money but lost an average of 5% more than the S&P 500 lost during that year! So you really need to think realistically about the potential that you might actually lose money that your family and friends give you. As the investing community says repeatedly, “Past performance does not guarantee future results.” Even if you’re the next investing genius, that truth applies to you, no matter whose money you’re investing.
So, you can see why you might want to politely decline requests from family or friends to invest for them. But if that’s not enough, in an effort to protect unsuspecting investors the Federal Government (specifically the SEC, or Securities and Exchange Commission), as well as the states, have created significant legal hoops you must jump through to trade for others.
Two Paths to Trading Stocks for Others
Let’s say that you’ve thought through the practical risks, and you still want to legally invest for others. How can you do that?
We’ll take a look at the two most common options, including an overview of the career path, as well as some pros and cons:
- Getting a job at an investment firm (and then taking friends and family on as clients).
- Becoming an independent Registered Investment Advisor (and then taking friends and family on as clients).
Become a Registered Representative of a Financial Firm
This first path is the employment path, where you work for (or at least under the umbrella of) a financial advisory firm, wirehouse, or broker-dealer as an investment representative or analyst. Even for independent investment advisors who create their own RIA (Registered Investment Advisor), this is how most professionals in the industry got their start.
With this option, you would apply to Financial Representative positions with companies like Fidelity Investments, Edward Jones, or TD Ameritrade. You might also apply to join the teams of Registered Investment Advisory Firms.
This path usually has a significant sales component, but you can get a base salary as well. So it’s a great way to get your start in the financial industry.
Once you were hired by one of these companies, they would train you and sponsor you to take the required exams. According to state and federal laws, you need to take and pass certain exams before you can give investment advice for compensation.
Here’s a table with the pros and cons of this option:
Pros and Cons of Working for a Broker-Dealer or Other Financial Firm
|This is a legal path to investing for others!|
And you’ll get training from the company’s
compliance department so you stay clear
|You’ll have to fit yourself into the existing|
systems, and will be limited by the policies of
the Firm. This means even more rules than
those that state and federal regulations create.
For the entrepreneurial sort, this can be frustrating.
|You get paid training and experience, as well|
as the support of the employing company’s resources
and established systems.
|Especially early in your career, you will|
have to give up a significant portion of
the revenue you generate to the firm, based
on your “production grid”.
|You can have a base salary, while commissions|
or performance-based incentives still provide
significant earning potential.
|You’ll likely have production minimums to keep up|
with in order to keep your position.
|You are supported by the employing company’s|
resources and established systems, so you can
focus on learning how to be a good investment advisor.
|Your exams are paid for by your employer.|
Next, we’ll consider another financial advisor career path that appeals more to the entrepreneurial personality.
Becoming an Independent Registered Investment Advisor (IAR)
There is no legal requirement that you work as a representative of another financial firm before starting your own firm. As long as you pass the appropriate exams and learn the skills you’ll need, you can become a Registered Investment Advisor, and begin helping family and friends with their investing needs!
If you choose this path, you’ll need to do more work upfront to set up your own business, find custodians to hold your accounts, and complete the compliance requirements. But you’ll have more flexibility and the potential for greater financial rewards down the road.
If you want to start your own advisory, here is a list of essential steps. There are many consulting companies that specialize in helping people go through this process:
- Choose your business type, Register, and obtain Tax IDs for your Business. An LLC is the most common, but you should check with a lawyer.
- Take and pass the FINRA Series 65 exam.
- Register with the Investment Adviser Registration Depository (IARD) as well as your State. Complete and submit Form ADV to the IARD.
- Set up your compliance processes and systems, contracts, and legal policies with the help of a consulting firm and/or lawyer.
- Make sure you’ve got a good bookkeeper and accounting system set up.
- Hang out your ‘shingle’ and begin talking to prospects.
That’s a lot of work. But the positives below make it worthwhile for many:
Pros and Cons of Starting Your Own RIA
|You’re independent.||You won’t have a salary. So it|
may be more difficult getting to the
point where you can live off the business.
|You have more freedom in time, compensation|
and fees, marketing and branding.
|You’re the only one responsible for|
everything, from marketing to compliance
(this can be alleviated by getting
help from an RIA Compliance and
|You also get to keep more of|
what you earn.
|You will have to seek out|
learning and development opportunities
for yourself, rather than relying on
an employer to direct you in that area.
Since we’re being thorough, let’s look at a couple exceptions to the licensing requirements.
(While exceptions exist, I recommend you use them with caution. I’m not a lawyer and this information is provided for educational purposes only; it’s not legal advice. If any of these options interests you, you can dig deeper on the SEC and FINRA websites.)
Limited Free Advice as a Friend
Most states allow you to give free advice to a limited number of family or friends, as long as you have no contractual relationship or compensation, and don’t present yourself as an investment advisor. Check into your state law.
Accounts for Minors
Another exception is children’s accounts. You’re allowed to set up and trade in a UTMA account for your minor children. But it really is their account and gets legally turned over to them as soon as they reach the age of majority designated by your state.
Providing General Education and Impersonalized Recommendations
As long as you’re not making recommendations to specific people, you’re allowed to provide general investment education. This basically falls under free speech and is why you don’t need a license to start an investment newsletter. But make it clear that you’re making general recommendations that are not customized to the individual.
You don’t need a license to start investing as part of an investment club. But there are specific rules about when a club qualifies as a club, and when it crosses over into financial advising. Basically, it’s only an investment club if everyone votes on every investment decision - so you’re definitely not “trading for others” with this option.
Wrapping It Up
If you’ve made it to the bottom, I hope you have more clarity about the question: “Can You Trade Stocks for Someone Else?” Please contact me if you have any questions or suggestions.
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