Option Fanatic, RIA (Part 7)

Comment [2] from my last post was particularly useful in bringing to light issues in need of legal review.

As mentioned, I love the idea of not having direct access to clients’ funds. Madoff-like frauds and Ponzi schemes succeed because clients give their money to a trustee. Good rapport with the nefarious trustee blocks any thought from investors’ minds about being swindled. Suspicion is held at bay through periodic financial statements from the trustee [or trustee’s business entity] with varying degrees of apparent authenticity.

Quite often when investors get duped, the money isn’t there but they think it is. If they could log into their own brokerage account and see real-time balances then this would never happen. The scary exceptions are brokerages that have gone bust. Those are supposed to be SIPC insured but I have no idea how long it would actually take to recover damages, how much I would end up recovering, etc.

As I’ve mentioned a few times before, remember the asterisk. Allowing clients to keep funds in their own personal accounts will separate me out from many investment advisers.

At the same time, though, I can see one potential problem with doing business this way. Would managing funds in this manner provide complete transparency with how I do my trading? If so then why could any client not watch what I do for a year or two and then fire me as an adviser in order to trade for themselves? Doesn’t any successful business need a moat of some sort to stave off competition? If there were nothing proprietary about a solid profit generator then others would rush in to start doing it themselves.

I’ll discuss this further in the next post.