Option Fanatic, RIA (Appendix A)

In my quest to complete unfinished drafts, what follows are thoughts composed in July 2014 pursuant to this blog mini-series.

In these three posts, I talked about taking custody of client assets with regard to trade opacity and liability. Custody is where a brokerage or other financial institution holds securities on behalf of the client.

Another consideration with regard to custody is trading efficiency. Custody would easily allow me to place all trades at once.

I really have no need to take time shortcuts in executing trades because I would only be looking to trade as many separately managed accounts (SMA) as I could reasonably handle on any given day.

Perhaps more important than opacity or efficiency are the rolls of red tape I would need in order to maintain compliance with the “Custody Rule.” The Custody Rule, part of the Investment Advisers Act of 1940, clarifies and builds upon the above [and Part 6] mention of “liability.” Its purpose is to provide protection for client funds or securities against the possibility of loss. I should do a complete blog post on the this since most people probably don’t know it exists.

For multiple reasons, my preference would be to avoid custody altogether. By maintaining control of their own accounts, clients will be able to see how much money they have and how the account is performing in real-time. I am not running a Ponzi scheme or Madoff fraud whereby I take client funds and provide only my trusted word about investment performance. Clients will still get monthly statements from their brokerage rather than only me [or my company].

Trading in SMA is probably in the best interests of the client and myself as adviser when starting out an RIA.

The next issue is whether to incorporate an investment advisory or to stay “off the record.” One internet source volunteered:

       > There is quite a lot of incorrect advice on this thread… if you are
       > carrying out investment business then that is a regulated activity
       > and if you are not regulated then if it all goes wrong then you are…
       > personally liable for all the losses. However it is not as clear cut as
       > all that… although it is a grey area if you are only managing a few
       > peoples money, (it comes under the broad umbrella of friends and
       > family) and it isn’t some [elderly woman] whose life savings you are
       > about to spunk up a wall, then there is no need to be regulated… I
       > would also say this isn’t just my opinion, I have spent a fair few
       > pennies getting legal advice on this very matter in the past. [1]

I will address this next time.