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Financial Advice Without Registration: How Far Can You Go?
Old 08-20-2008, 06:53 PM   #1
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Financial Advice Without Registration: How Far Can You Go?

Can anybody here help me answer these questions about how the Investment Advisers Act is actually applied?

I realize that anybody who is compensated for advising others about investing generally needs to be registered with the state or SEC. But I have two questions:

(1) Apparently this requirement includes "...through publications or writings..." Yet I have the sense that quite a bit is written about investing, for pay, and not always by individuals who are registered. Surely not everybody is registered who writes for the thousands of financial sites on the web that generate income? So where is the line? Is this only really enforced if you are selling securities?

(2) Apparently also there is an exemption for the role of "private investment adviser" -- somebody who does not advertise and has fewer than 15 clients. Now I've had some family and friends approach me about managing their investments, for a fee. Can I do this without registration/compliance issues, or is it much more complicated than that?

If anybody can answer these questions, or point me to answers, I'd be most appreciative. And if this falls into the domain of securities law where I ought to talk to an attorney, I'd be grateful for a referral. (Send me a private message.) Thanks!
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Old 08-20-2008, 09:58 PM   #2
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Most advisors who manage under $25M are regulated only by the laws of their state. I suggest you contact your state securities department or a local securities attorney.
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Old 08-21-2008, 09:08 AM   #3
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Newspapers and magazines are exempted/excepted (I get these mixed up sometimes) Here's the definition of an investment advisor with exclusions from Section 202

"Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include

  1. a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, except that the term "investment adviser" includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser;
  2. any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession;
  3. any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor;
  4. the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation;
  5. any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to section 3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act;
  6. any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934, unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others; or
  7. such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.
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Old 08-21-2008, 05:49 PM   #4
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Thank you Sarah. Given that the act specifically mentions "publications or writings" I had assumed the exemption for publishers was for the actual business entity publishing the periodical, not for the writers. And then there is the question of how this applies to the Internet. Sounds like legal advice is advisable. Thanks again.
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Old 08-21-2008, 06:19 PM   #5
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(2) Apparently also there is an exemption for the role of "private investment adviser" -- somebody who does not advertise and has fewer than 15 clients. Now I've had some family and friends approach me about managing their investments, for a fee. Can I do this without registration/compliance issues, or is it much more complicated than that?
I would pass on the money, and the only advice I would give is read some of the ER reading list. What happens when your family and friends lose money?

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Old 08-22-2008, 11:24 AM   #6
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The individuals in question are busy professionals, have significant assets, and have very limited time to read or manage investments themselves. They have all had bad experiences with brokers/advisers and want somebody they trust. If they lose money (in the short term), then the same thing happens as in any such relationship: I remind them of the risk/reward characteristics of the asset allocation we've chosen together; I point out the growth or stability in their uncorrelated assets; I coach them to be patient and take the long view. And if that doesn't work, then they go elsewhere.

That said, I respect your advice. Mixing business and personal relationships is always a potential bag of worms, and I'm not at all convinced I want to do this.
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Old 08-22-2008, 11:39 AM   #7
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I have a few people who want investment advice from me... What I do is tell them when I make changes to my portfolio, they can follow, or not. I definatly don't charge them anything, because then I would be responsible for any loses. I don't want that kind of stress.

Typically its, I'm buying this because Y event, I'm selling that because Z event. I changed my bond allocation to this, I increased my small cap holdings to X, I'm putting 20K into this ETF, and so on.

If they want to know more, they ask, if they want to follow they do. That doesn't add any "extra" work for me, I just tell them what I'm doing and why I'm doing it. I rarely invest in individual stocks, my playing money is in sector ETF's, so it rarely makes a difference if they buy today, or tomorrow or next wednesday. (but if it might make a difference I tell them that possiblity as well)

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Old 08-22-2008, 12:07 PM   #8
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The individuals in question are busy professionals, have significant assets, and have very limited time to read or manage investments themselves. They have all had bad experiences with brokers/advisers and want somebody they trust. If they lose money (in the short term), then the same thing happens as in any such relationship: I remind them of the risk/reward characteristics of the asset allocation we've chosen together; I point out the growth or stability in their uncorrelated assets; I coach them to be patient and take the long view. And if that doesn't work, then they go elsewhere.

Well, you would need to get licensed, have a broker dealer to work with, and spend about $2000 on yearly E&O insurance. All of that before managing their assets.

I have seen a fair number of family relationships torn apart over money, bit your situation could be different............
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Old 08-22-2008, 12:26 PM   #9
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Those people should hire an FA or an RIA
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Old 08-22-2008, 12:27 PM   #10
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Those people should hire an FA or an RIA
Our team would be glad to take them on, I work in a partnership in an RIA..........
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Old 08-22-2008, 02:49 PM   #11
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These people have tried various financial professionals and been dissatisfied. They want somebody they trust, with experience, who doesn't need to make a lot of money off them.

I called my state securities department: You can in fact be a "private investment adviser" (if you don't advertise and have fewer than 15 clients) and not be subject to registration. The E&O insurance sounds like a good idea, but I bet it's hard to buy if you aren't licensed. As for brokerage accounts: they already have them. Ideally they would be executing the trades monthly or quarterly, based on my instructions -- I wouldn't even need access.

Thanks for the replies. Keep poking holes in this: If you keep me from doing something dumb, you'll be doing me a favor. :-)
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Old 08-22-2008, 03:08 PM   #12
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You can't buy E&O if you're not licensed. If you honestly want to do this, you NEED to clearly state your investment objectives for them, etc. It's called an Investment Policy Statement, my team uses it with EVERY new client. It would be called CYA in your case.........

What does "not a lot of money" off them mean, no fee accounts? For our non-fee based retail stock accounts, we are a discount broker, which means most stock trades are $29-$49. For large amounts if shares, we do it on a cents per share basis, similar to how institutional traders operate. Large trades could get as high as $100 but that is rare.
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Old 08-22-2008, 05:09 PM   #13
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Headingout, I am very interested in how this eventually works out for you. It is pretty much what I wanted to. You have friends some close some not who you see getting screwed by the large number of unscrupulous/incompetent financial helpers. For every FinanceDude/Suluki/Sarah out there several on the bad side.

They trust your integrity and financial knowledge. It is too much work to do comprehensive planning for free and quite frankly if they pay/compensate you there are far more likely to follow through than if you give them the advice for free.

I went as far as paying for an online CFP course, went through the first course, and decided this just wasn't much fun. In fact the Section 202 that Sarah quoted was an ephinany for me when I read it in my introduction course. I realized that A. I didn't to actually have to get a CFP to give advice and B. in order to get a CFP, I'd have to memorize a zillion factoids just like section 202.

I'll give you one piece of encouragement. I continued to manage my ex-girlfriends investments for a year after we broke up, she did compensate me and I think we both were happy with the arrangement. She left the state which is why we ended the arrangement. All that said as you know this is a minefield.
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Old 08-23-2008, 11:26 PM   #14
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Clifp, you put it well. What I've observed so far is that these friends/family definitely need advice tailored to their situation, just telling them what I'm doing in my portfolio wouldn't work because each situation is quite different. They have had bad experiences with professionals and don't want to go in that direction. It's too much work for me to do for free, so they don't yet have a full-time commitment from me and to my advice. The result: inaction -- money sitting in money market accounts and/or unwanted/inappropriate investments.

My trajectory through this issue is surprisingly similar to yours. Last year I decided to pursue the CFP and also passed the first course, online. In the process I learned that (1) a CFP is not required or sufficient to dispense advice, and (2) though it is an impressive credential, it also requires regurgitating for the exam lots of material that I could not love (think laws/regulations/taxes).

I appreciate the encouragement, but I'm still very conflicted about this. One issue: I figure I'd need a half-dozen accounts to make this work for me. (I'd charge something like a 0.5% annual fee and we'd be working primarily with funds so there would be minimal trading costs.) Since I couldn't advertise, I'd have to lean on my friends/family for word of mouth. It might work OK, but could get uncomfortable trying to bring in those extra accounts. Coupled with the known minefield of money+personal relationships, I'm definitely not rushing into this. I will run the idea by various parties and just see how it develops....
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Old 08-24-2008, 07:39 AM   #15
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Clifp, you put it well. What I've observed so far is that these friends/family definitely need advice tailored to their situation, just telling them what I'm doing in my portfolio wouldn't work because each situation is quite different. They have had bad experiences with professionals and don't want to go in that direction. It's too much work for me to do for free, so they don't yet have a full-time commitment from me and to my advice. The result: inaction -- money sitting in money market accounts and/or unwanted/inappropriate investments.

My trajectory through this issue is surprisingly similar to yours. Last year I decided to pursue the CFP and also passed the first course, online. In the process I learned that (1) a CFP is not required or sufficient to dispense advice, and (2) though it is an impressive credential, it also requires regurgitating for the exam lots of material that I could not love (think laws/regulations/taxes).

I appreciate the encouragement, but I'm still very conflicted about this. One issue: I figure I'd need a half-dozen accounts to make this work for me. (I'd charge something like a 0.5% annual fee and we'd be working primarily with funds so there would be minimal trading costs.) Since I couldn't advertise, I'd have to lean on my friends/family for word of mouth. It might work OK, but could get uncomfortable trying to bring in those extra accounts. Coupled with the known minefield of money+personal relationships, I'm definitely not rushing into this. I will run the idea by various parties and just see how it develops....
Here's a couple bits of advice based on what you've said so far.

1. All those boring laws, regulation and tax info are part of the CFP curriculum because they are important to giving people investment advice.

2. Getting E&O insurance as an independent, unaffiliated, and unlicensed advisor is impossible. I have a friend who is totally independent and not affilliated with a BD (but licensed). He pays $12K a year for $1M in coverage which is near a bare minimum. Going bare (without insurance) is a VERY BAD IDEA. Close friends and in some cases even family can very quickly become adversaries in a down market. Every year honest good hearted professionals spend tons of money fending off complaints and arbitration claims from unhappy clients even when no fraud or misconduct is involved.

I think your time would be better spent seeking out a really good, fairly priced, experience fee based advisor that you can send these people to. But that's just my opinion.
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Old 08-24-2008, 01:06 PM   #16
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Points well taken saluki9. My replies would be:

1. Some of the tedious stuff in the CFP curriculum really wouldn't be required, because it has to do with the CFP credential itself and/or compliance issues that don't apply to a private adviser. Also, in my opinion, it is possible to have a working knowledge in an area (knowing where to go for answers), without necessarily being at the level to pass a rigorous closed-book exam.

2. I assume that incorporating would provide some protection here (of personal assets, though not the business of course). I have a friend who is an adviser, another who is a surgeon, 20-30 years experience, neither have been sued. It's all about the relationship they say: with family/friends I'd have a head start. That said, it would be foolish not to prepare for the worst. People are people.

All things considered, I remain ambivalent about this idea of being a private investment adviser.

I'm starting to lean in the direction of the first point in my first post above: just writing about investing. I did a lot of magazine writing earlier in my career, and over the last year I've purchased some potentially valuable finance-related domain names. When I talked to my state securities department, they said publishing is OK as long as you aren't tailoring your advice for a certain individual's portfolio. It's harder to produce income as a writer than adviser, but the potential costs and risks are lower, and my investment philosophy has always been about low-cost, low-risk investing. :-)

Thanks everybody for the critique so far -- further thoughts are welcome....
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Old 08-24-2008, 06:23 PM   #17
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I like more and more your idea of writing about investing. There are a million small newsletters out there for investors, my older boss has been writing one for 30 years.

One point I'll make about the CFP and the holy grail CFA that a few of these very smart guys have: the point of learning about stuff like tax law, estate planning, retirement plans and insurance, IN ADDITION to investing, is that you are often expected to actually help people with their overall life plan--not just investments.

Most folks don't just need 6 mutual funds, they need to know that they should have a will, health care POA, guardianship and trust setups for their kids, how to value their small business, which retirement plan (DBP or PSP or what have you) will be best for their small business, etc. We were taught to think of the CFP as the quarterback, coordinating the work of the estate attorney, the CPA, the actuary, and the insurance broker for the client.

These are the things that most CFPs are called about, not about buy/sell that fund or stock. Your mileage may vary.
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Old 08-24-2008, 07:56 PM   #18
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Most folks don't just need 6 mutual funds, they need to know that they should have a will, health care POA, guardianship and trust setups for their kids, how to value their small business, which retirement plan (DBP or PSP or what have you) will be best for their small business, etc. We were taught to think of the CFP as the quarterback, coordinating the work of the estate attorney, the CPA, the actuary, and the insurance broker for the client.

These are the things that most CFPs are called about, not about buy/sell that fund or stock. Your mileage may vary.

All excellent points, and why a CFP is a valuable certification.

The flip side of this is I, and I''m guessing headingout, don't really want to give advice about these things or even necessarily make referral to professional. For example many maybe even most families need some type of life insurance, but I can't imagine a situation where I'd actually sell an insurance policy. At best, I could look at a person financial situation and say "Gee Joe, with Sue no longer working and the three kids under 8, you need some life insurance", but even if I had my CFP and was working for LPL, I simply wouldn't want to send a friend or even casual acquaintance to see a life insurance agent. Same thing with valuing a small business, if somebody need that type of advice, I'm not the guy to be involved. (Although, I supposed I do this a bit with Angel investing)

On the other hand there are a lot of people who are in their 40s and 50s, who have accumulated significant assets, and need more help than just selecting which mutual funds to invest their 401K. The are often the peak of the career and simply don't have time and/or interest to do any research.

Unfortunately selecting a financial adviser is almost as much of a crap shoot as selecting a managed mutual fund for every DFA, or American Funds there are the 75% that underperform. So they ended up doing nothing, or perhaps worse end up at Amerprise or Edward Jones.

I am sure there is some 20 something financial adviser who knows all the tax ramifications and investment pitfalls associated with a couple million dollars worth of vested and unvested GOOG stock options, I just haven't met him or her yet. I on the other hand feel pretty qualified to help out in such a situation have been there done that and continued to study and learn about employee options over the last 9 years.

Writing advice on a newsletter or a ER forums is somewhat useful, but since every situation is unique, it is hard for the busy career person to translate general advice into action for themselves. I have derived great satisfaction by saving friends and families. tens of thousand of dollars in lower taxes/higher returns. However, like headingout the next step is a scary one and the prospect of being sued is truly terrifying.
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