Option Fanatic, RIA (Part 6)

Today I will continue responding to Internet posts about managing OPM.

       “There is a massive difference between setting up [a] business offering…
       trading services and doing it for a friend… tax and regulation are
       not matters that concern you if it is an informal agreement between you
       and your mate… it is a very simple process, you just need to trust your
       friend to pay up when/if you make him money.” [1]

I interpret this to suggest agreeing to trade money for a friend or family member in exchange for “under the table” payment.

One benefit to this would be forgoing the need to hire an attorney, to verify and maintain compliance, to get registered through FINRA, etc. I could save money in overhead, too.

I worry about liability, however. Emotions may turn sour if money is lost. People who are friends or family today can become vengeful enemies tomorrow. Nobody would think twice if I had official legal documents to sign as part of the investing process. I think they would even feel safer and more protected.

       “Your friend sets up a [brokerage] account. When activated he
       requests a power of attorney form… now [you]… have the power
       to place… trades… money can only go in and out from… [your
       friend’s] bank [account]… agree [on] a [payment plan] and make
       sure your mate understands that there are risks involved. [Your]
       friend can’t sue… as… both signed a legal… agreement for [you]
       to place trades on his behalf… the account holder can withdraw
       money [to pay your fees]… the key issue here is that they are
       friends. They don’t need to set up a hedge fund…” [2]

I love the idea of not having direct access to clients’ funds. I am not setting up a [hedge] fund and I am only looking to trade as many accounts as I can log into individually. While the power of attorney may therefore be part of the arrangement, I still think this could still leave me open to additional liability if I don’t go through legal channels with compliance mandates, registration, and consent forms.

These comments give me very useful content to discuss with a lawyer. I don’t fear clients would sue me because I traded for them. I fear they might sue trying to claim that I was not qualified and/or that they did not understand something.