How To Legally Trade Other Peoples Money

I trade using my e-trade brokerage account and I do pretty well. I have a great intuition and all my friends want to give me their money to invest for them.

How do I do it?

I'm not an accredited investor and have no licenses but still, there's gotta be a cheap quick way to do it. Can I just set up an LLC or something? What license do I need if I truly do need one?

Can You Invest Money for Friends?

While there are ways you can legally invest money for friends, "No, don't do it," seems to be the general consensus among the WSO community. In addition to legal and tax implications and potential operating costs, there's the personal aspect of it. These are your friends. What happens if your great intuition doesn't turn out to be so great?

Possible Investment Structures and Important Considerations

If you decide to go ahead anyway, research research research, and make sure you have good legal counsel. Some structures that have been proposed include:

Investment Club

How does it work: A group of people pool their funds to invest together. It is arranged as a partnership and typically the groups make investment decisions together.
Important considerations: There are SEC filing requirements depending on how the Investment Club operates. You'll need to set up an organizational and legal structure (such as an LLC, see below).

Here are some questions to ask from The College Investor when starting an Investment Club.

Open A LLC Together

How does it work: A Limited Liability Company can allow people to pool their money together to invest. The operating agreement will detail the investment strategy, similar to a mutual fund prospectus, and ownership structure.
Important considerations: LLC fees vary by state. The operating agreement, while helpful, should be reviewed by every member's attorney. It's important to get additional legal and tax advise if you go with this format.

Put Friends' Money into Your Personal Brokerage Account

How does it work: Friends essentially loan you their money. You invest it in your personal brokerage account and split gains and losses based on their portion of overall account.
Important considerations: With this structure you will bear the full tax implications. With a gain, you could put an agreement in place to have a friend pay his or her portion of the tax bill, but about a loss? Your friend won't be able to deduct it. Depending on how much money your friend gives you, there could be gift tax issues.

Have Friends Set up their Own Brokerage Account

How does it work: Friends may want you to advise them on trades or may give you the login details to their account to trade for them.
Important considerations: Most users are in agreement that a setup like this would require a securities license of some sort.

The Bottom Line

Even after considering these different structures, many people will likely still recommend that you don't do it. There are ways to invest your friends' money, but it's complicated. Even if you have had great intuition when it comes to investing, it may be worth keeping in mind that timeless credo of all great asset management companies: 'Past performance is no guarantee of future results.'

If you choose not to go down this path, maybe you can turn your investing skills into a career with an established company. Learn more about preparing for a career in Hedge Funds, with the WSO Hedge Fund Interview Prep Course.