How do I run money for a few relatives?
- Thread starter fishhook
- Start date
The easiest and most cost-effective solution for rather small amounts of money is to just pool the money all into your individual account.
Just calculate the cap gains tax on the profits and subtract them out.
To distribute profits to your investors, you can just write a check or wire them the money because you are allowed to give a 'gift' of up to $10,000 per person per year without having to pay gift tax.
Now obviously, once you make more than $10,000 per year for each of your investors, you will need to set up a separate entity.
Just calculate the cap gains tax on the profits and subtract them out.
To distribute profits to your investors, you can just write a check or wire them the money because you are allowed to give a 'gift' of up to $10,000 per person per year without having to pay gift tax.
Now obviously, once you make more than $10,000 per year for each of your investors, you will need to set up a separate entity.
Yes it is legal. Here is what I did. I opened up a friends and family account at Interactive Brokers making myself the Advisor. They simply opened up a subaccount that was linked to my account. I have NOT setup a LLC, PLC, hedge fund etc.... The only thing that I had to do is register with the NFA. (since I only trade futures) However, if you trade stocks then you need to contact the state in which your friends live in and register with that state as an advisor.
Here is the link from the IB website
http://www.interactivebrokers.com/en/main.php
Go here click on Advisors on the left/ scroll down click on Account Information/ click on the 1st link Advisor Registration Requirements
When trading through IB as an advisor the only difference between trading an account that is a non-advisor and an advisor account is that you have to specify how to allocate each contracts/shares before you can place the trade. It takes me an extra 2 seconds to do this. Very easy. I highly suggest looking into using IB.
Here is the link from the IB website
http://www.interactivebrokers.com/en/main.php
Go here click on Advisors on the left/ scroll down click on Account Information/ click on the 1st link Advisor Registration Requirements
When trading through IB as an advisor the only difference between trading an account that is a non-advisor and an advisor account is that you have to specify how to allocate each contracts/shares before you can place the trade. It takes me an extra 2 seconds to do this. Very easy. I highly suggest looking into using IB.
NO WAY. I got my career started with a family fund. You have to be careful...but go for it.
here is how i did it
1. START SMALL...you will screw up every now and then. as numbers are good ask if they would like to add more.
2. I put all funds into 1 account...you can do it under a business account. it is cheap and easy to set up a business. Learn a bit of back office procedures to be able to value the fund correctly and report to each of the investors their end of year P&L.
3. be very porfessional about it. I send letters to all of them every month with an up date...the good and the bad.
4. If you screw up...notify them immediately...dont try to cover anything up.
5. be very open about your methodology...and focus on risk control..they will feel better about it.
6. audit your EOY financials and use that info later to go pro. This is how i sold my fund to a broker dealer(that sounds much fanmcier than it is..i just have a base salary, acess to clients, and a potential big ass end of year bonus if i hit numbers)...3 years audited financials.
shoot me an email with any questions...dac8555@hotmail.com
I am going to elaborate on this...I have experience here becuse i was a stockbroker.
YOU WONT HAVE PROBLEMS IF YOU PREPARE THEM FOR THE WORST UP FRONT.
My dad has a million plus in the market...he started $15k with me...matching what i had. I told him it was pure risk capital, and it is higher risk than what he is used to. He continues to add more little by little as i prove the returns are good and the growth is stable. then it brances out to other family, a few friends etc. At that point (after a few years) you can start asking for a small fee becuse it is going to take LOTS of your time. The acocunt is now several hundred thousand, and i have gone pro.
ask the question "will we have problems if suffer a 50% loss???" prepare them for any potential problems before you start.
dont promise anything...dont take money from risk averse people, and dont take money from anyone that needs that money any time soon...you will be FINE.
Wow! Great responses here and lots of thoughtful advice. In the interest of giving back-- here is what I have discovered so far (since I posted the original question.) I am just going to put in all and every last detail for anyone else who might have similar questions. (And perhaps for anyone to comment on with additional thoughts/info.)
I called a securities Lawyer ($500/hour) who told me that small F+F stuff is governed by State Law, and each State has its own rules. In some states, like the state I am in, there is an exemption if both: (a) all the investors are accredited (which is generally, in most states, 1m net worth, but can vary.) and (b) I have less than "x" investors (some states say 3, some 5, some 8.)
This is all well and good (if you are in an exemption state) but there is the additional hurdle that if your investor is in a different state, you have to satisfy that state's laws. In my case, my main investor is in a state which has no exemption, which means to trade his money I have to have pass either: (a) Series 7 AND "63" (In quotes because I think 63 was it, take it with a grain of salt, having trouble reading my own handwriting from the call!) OR (b) Series 65 which is the Investment Advisor test.
Worse, in the state of one potential F+F client (even if I have the 65) I cannot take a performance fee (ie % of profit) unless the investor puts in 750k. Uggg.
Also: pooling money is something people apparently do (for small F+F trading)- but is not legit. To pool money you have to do a private placement (which is setting up a hedge fund.) So the suggestion in this thread to pool money (without the hedge fund structure, and 40k to 50k in fees to set up) is apparently illegal.
Last: The legal fees for setting everything up as an Investment Advisor (according to the esq. I spoke with-- who I liked a lot and was a straight shooter imho) is about 2k. You need power of attorney over the client accounts and a few other docs.
And last-- as others here have said-- IB is great for this, with great functionality with the software on the trader workstation for allocating to the sub accounts.
Well, damn, I have to go start studying for the Series 65 (which I am going to do, since this is the only way I can get started with OPM) Anyone have any advice for me on that?
Thanks for the input everyone! Good trading all!
I called a securities Lawyer ($500/hour) who told me that small F+F stuff is governed by State Law, and each State has its own rules. In some states, like the state I am in, there is an exemption if both: (a) all the investors are accredited (which is generally, in most states, 1m net worth, but can vary.) and (b) I have less than "x" investors (some states say 3, some 5, some 8.)
This is all well and good (if you are in an exemption state) but there is the additional hurdle that if your investor is in a different state, you have to satisfy that state's laws. In my case, my main investor is in a state which has no exemption, which means to trade his money I have to have pass either: (a) Series 7 AND "63" (In quotes because I think 63 was it, take it with a grain of salt, having trouble reading my own handwriting from the call!) OR (b) Series 65 which is the Investment Advisor test.
Worse, in the state of one potential F+F client (even if I have the 65) I cannot take a performance fee (ie % of profit) unless the investor puts in 750k. Uggg.
Also: pooling money is something people apparently do (for small F+F trading)- but is not legit. To pool money you have to do a private placement (which is setting up a hedge fund.) So the suggestion in this thread to pool money (without the hedge fund structure, and 40k to 50k in fees to set up) is apparently illegal.
Last: The legal fees for setting everything up as an Investment Advisor (according to the esq. I spoke with-- who I liked a lot and was a straight shooter imho) is about 2k. You need power of attorney over the client accounts and a few other docs.
And last-- as others here have said-- IB is great for this, with great functionality with the software on the trader workstation for allocating to the sub accounts.
Well, damn, I have to go start studying for the Series 65 (which I am going to do, since this is the only way I can get started with OPM) Anyone have any advice for me on that?
Thanks for the input everyone! Good trading all!
Yet another reason to run a commodities pool instead. Not asking you to change your trading style or move to futures from stock just for this - but just another benefit of futures over stocks.
http://www.cftc.gov/opa/backgrounder/opacpocta.htm
"Regulation 4.13(a)(2) is intended to apply to a small pool where the total gross capital contributions to all pools which the CPO operates, or intends to operate, do not exceed $400,000 and there are no more than 15 (fifteen) participants in any one pool."
AFAIK, those 15 participants doesn't need to be "accredited" or something.
Disclaimer : I am not a lawyer, and I am not qualified to give advise. Do your own due diligence. Just quoting a government site
http://www.cftc.gov/opa/backgrounder/opacpocta.htm
"Regulation 4.13(a)(2) is intended to apply to a small pool where the total gross capital contributions to all pools which the CPO operates, or intends to operate, do not exceed $400,000 and there are no more than 15 (fifteen) participants in any one pool."
AFAIK, those 15 participants doesn't need to be "accredited" or something.
Disclaimer : I am not a lawyer, and I am not qualified to give advise. Do your own due diligence. Just quoting a government site