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I've thought of two approaches so far:

  1. Pool their money into my own brokerage account and simply split the gains/losses proportional to the amount of money that we've each contributed to the account. I'm wary of this approach due to the tax implications and perhaps other legal issues so I'd appreciate community insight here.
  2. Have them set up their own brokerage account and have them give me the login credentials and I manage the investments for them. This is obviously the best approach from a tracking and tax perspective, but harder for me to manage; to be honest I'm already spending more time than I want to managing my own investments, so option 1 really appeals to me if the drawbacks aren't prohibitive.
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    One potential problem I immediately see with option 1 is that you are on the hook for the full tax bill. You're essentially loaning money to a friend by agreeing to pay any taxes, with all the potential complications that could arise from such a loan. You may assume that your friend will pay you back, but what if you incur a capital loss and want to deduct it from your taxes? Will your friend want to deduct his part of the loss? – John Bensin Aug 23 '13 at 20:00
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Pool their money into my own brokerage account and simply split the gains/losses proportional to the amount of money that we've each contributed to the account. I'm wary of this approach due to the tax implications and perhaps other legal issues so I'd appreciate community insight here.

You're right to be wary. You might run into gift tax issues, as well as income tax liability and appropriation of earnings. Not a good idea at all. Don't do this.

Have them set up their own brokerage account and have them give me the login credentials and I manage the investments for them. This is obviously the best approach from a tracking and tax perspective, but harder for me to manage; to be honest I'm already spending more time than I want to managing my own investments, so option 1 really appeals to me if the drawbacks aren't prohibitive.

That would also require you to be a licensed financial adviser, at least to the best of my understanding. Otherwise there's a lot of issues with potential liability (if you make investments that lose money - you might be required to repay the losses).


You should do this only with a proper legal and tax advice - from an attorney and/or CPA/EA licensed in your state. There are proper ways to do this (limited partnership or LLC, for example), but you have to cover your ass-ets with proper operating agreements in place that have to be reviewed by legal counsel of each of the members/partners,

  • I was looking at this related question before posting this question: legal documents required for managing an investment portfolio I think a simple contract and partnership like the one linked to from there could cover our ass-ets. In the case of an investment club, I don't have to be a licensed financial adviser either. – Matt Chambers Aug 23 '13 at 22:22
  • I guess the real question is, can I create the partnership (as a joint account?) at my broker, then move my individual brokerage account to that account, then have my friend move funds in? Then the partnership, according to the trusty Wikipedia, has to file Form 1065 and Schedule K-1 for taxes, and if it's a general partnership or LLC/P, the tax liability is passed on to the members to pay (and it will be proportional to their capital investment in the partnership). – Matt Chambers Aug 23 '13 at 22:29
  • @matt that's the general idea. The account has to be in the name of the partnership, and the distribution of profits, losses and assets is per the operating agreement. Limited partnership is better since general partners may be liable for some SE taxes, but since all the income is investment income that may not be an issue. Check with a lawyer and a tax adviser. – littleadv Aug 23 '13 at 22:33
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how many transactions per year do you intend? Mixing the funds is an issue for the reasons stated. But. I have a similar situation managing money for others, and the solution was a power of attorney. When I sign into my brokerage account, I see these other accounts and can trade them, but the owners get their own tax reporting.

  • Which brokerage are you using that supports this feature? – chaqke Jun 23 '15 at 22:19
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    Charles Schwab . – JoeTaxpayer Jun 23 '15 at 23:34
  • ETrade also does this. – Peter K. Apr 13 '16 at 13:20
  • Correct me if I'm wrong, but I thought the POA authorizes you to take actions that execute the wishes of the person granting the power. If you're making investment decisions for them rather than just executing the decisions that they made, I think that you've exceeded your authority. Not that you're a charlatan, but it seems like, if this were allowed, it would be a loop-hole so big that no advisor would have to get licensed. – user32479 Apr 13 '16 at 14:01
  • "It is required that an RIA be registered with state regulators in the applicable state it conducts business and/or where the RIA firm has more than 5 clients with whom it provides investment advice to or engages in a business relationship with." - anyone doing it full time would run into trouble. I believe there was also a dollar minimum, which I'm not above. – JoeTaxpayer Apr 13 '16 at 14:58
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There's a sizable community of people and fiscal advisers who advocate not managing the money at all.

Set your passive investor friend with automatic bank draft into a simple three/four fund portfolio of low cost index funds and never never ever trade. See https://www.bogleheads.org/RecommendedReading.php

You might be able to beat the stock market for a few years, but probably not over the long term. Most mutual fund professionals don't. Playing with your own money is one thing: playing with other people's money is a whole other ball game.

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If you want to do #1, then you should form an "investment club." This is an entity that is recognized by the SEC and the IRS. From the SEC:

An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions.

https://www.sec.gov/investor/pubs/invclub.htm

You should do your own legal research on how to organize, but I believe that a common way is to form a formal partnership, which then provides the legal structure for distributing gains, tax liability, income, and other costs to the members. IRS publication 550 has a section on Investment Clubs from a tax perspective, but I'd definitely recommend get professional help on this in addition to whatever you can read yourself.

As for #2, I believe that's illegal unless you're licensed.

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