Recently, with my friend’s permission, I started placing trades for him in his personal account. In turn, I will receive after tax profits if the trades are profitable. If not, I am not liable and owe him nothing. We have this in writing. For the CPAs out there or anyone else who knows what’s up, how should we set up this arrangement so that we’re completely above water? The account size is less than 5K. Any advice is greatly appreciated. Thank you.
I would toss away the writing otherwise you’re basically running a discretionary account by the sounds of it so you should do a complete IPS/know your client forms etc. since you’ll be liable and have a fidicuary duty etc… Also, you should be licesnsed so there’s that side to consider as well… BUT… I would get him to sign one additional form - a waiver saying that he won’t/'can’t sue etc if you mess up… I would probably go with this instead.
Here’s another caveat…I am not in the industry. In fact, my profession has nothing to do with finance or accounting. I have no current licenses. My series 7 & 63 has long since expired. Basically, I am a stock geek, trying to break into the industry. Wouldn’t a form like a K1 or some sort of partnership profiting arrangement suffice?
well, what are you picks?
My understanding of a K1 is that it is a tax form for trusts, etc. I dont think that is applicable, unless the assets are in a trust, which you would have to be a beneficiary of. That said, I am not a tax guy in the slightest and someone could very easily tell me I am wrong. I am not sure about licensing, I am not on sell side. I would think that an agreement to manage a discretionary account would pre-empt licensing, as you are not with a registered sell side firm. Heck, to take it to an extreme, hedge funds manage money for clients on a discretionary basis and are not registered. This guy may or may not be a sophisticated investor, which may have some play, I dont know. Fiduciary duty - Everyone in the broad profession should hold themselves up to this standard, as it is an ethical high ground and it is the right thing to do, without question (I couldnt emphasise this enough). The CFA Institute’s code of ethics says that members and candidates must act in the interest of their clients, etc. However, not everyone actually has an actual legal fiduciary duty, as frightening as that is. Trust administrators, ERISA sponsors, registered investment advisers, etc, do have this legal duty. Brokers DO NOT, even if they call themselves financial advisors. You can say you will act in your clients best interest, put their interests ahead of your own, etc, but you do not have a legal fiduciary duty (though you should certainly act as such!!!), which will cause inherent conflicts of interest. I would certainly have him sign some sort of agreement on recourse for losses. But, this begs the question - why would he give you after tax profits? What is in it for him? Nothing. Sounds like you own a free call option on the upside. I’d call this a generous arrangement that will lead you to take inappropriate risk to capture upside without any of the threat of downside. Not trying to be critical, trust me.
“But, this begs the question - why would he give you after tax profits? What is in it for him? Nothing. Sounds like you own a free call option on the upside. I’d call this a generous arrangement that will lead you to take inappropriate risk to capture upside without any of the threat of downside. Not trying to be critical, trust me.” I believe the word you’re looking for is “hedge fund”.
lever 'er up 10x!.. I mean, the client doesnt even get to keep 80% if manager was taking 2 & 20. There is ZERO upside.
0% and 100% free structure, even better than 2% and 20%!
^ not if your managing $10,000
Good sense everyone, thank you! Basically, my friend has given me full discretion. He knows my background is in speculative trading (with a focus on price and volume) and money management and he knows I study equities and the financial markets in general via the CFA program. My global, top-down approach coupled with my technical analysis skills intrigues him. That’s what he gets out of the deal. With the amount of dough he has entrusted with me, less than 5K, it’s really not that easy for him to find someone he trusts, with his best interest in mind, to do what he wants. He wants fast and calculated action. Of which I am happy to provide. He has a majority of his assets in real estate with what sounds like a relatively small portion in stocks. I suspect he has other funds elsewhere. More or less, this is gambling money for him. He wants to see what I can do. I think I will have him sign a a recourse of losses agreement. Right now we only have a profit sharing agreement documented. So, I don’t need to be licensed to do this for him?
It would be a non recourse agreement, though that is generally in the arena of debt. I don’t know what the technical/legal name for it would be here. I honestly don’t think you would need a license. But I am not 100%. A compliance person could very well tell me I am wrong. You are not selling financial products which would require NASD licenses. And, you are no longer with a NASD registered firm (as your licenses have expired). Whats the rule, under 15mm in AUM and an investment adviser does not need to file with the SEC? It has been a long time, I don’t remember the specifics. I still don’t get it… “he wants fast and calculated action”… to do what? Pay commissions and eat losses with no possible chance at profit? He should just go to the casino for fast action and donate his winnings to charity to lose the upside potential, then he gets the tax writeoff. But, back to the important question - what are ur picks?
“Pay commissions and eat losses with no possible chance at profit? He should just go to the casino for fast action and donate his winnings to charity to lose the upside potential, then he gets the tax writeoff.” This is no trading strategy. I have bought one stock and will hold it for 6 months. That’s it. It’ll cost him $14 per round turn. He very well may lose it all. So yes, it is roughly the same as putting it all on black. What do you mean, “no possible chance at profit”? I’m not one to tout about my picks. Perhaps that’s my insecurities talking.
^ I could care less about your past picks… What do you like NOW?
I’d just be careful about mixing business with friendship. If/when your picks tank and he loses half his money, he may be pissed at you regardless of some bs contract you have. Say it won’t happen, but you can’t have much diversification with
With an amount less than $100,000, let alone less than $5,000 trading costs and taxes would eat away from your return. Less $5,000? not worth the liability attached to the responsibilty. Pass.
Thanks everyone.
Was saying that you were to receive after tax profits, which implies that he receives zero. He pays commissions and you keep the profits. Very one sided. He is just giving you money to practice with. Its very generous. Thats all I was getting at.
I see. I keep 20% of AT profits. Still pretty cool, I think. Cheers!
It’s going to be hard to diversify appropriately with only 5 or 10k. Penny stocks are notoriously risky, and I think they are not always all that liquid.
There are no plans to diversify. I will only invest in AMEX, NYSE, or NASDAQ listed stocks. For real, this guy is well aware that he may lose all of his money. Ideally though, we’ll double it or even grab 5 bags out of the deal. It does happen, on both sides.