Can my friends give me money to invest in my portfolio for them?

Question

Basically I am wondering if I already have an account with a etrade/ameritrade/etc... and am trading with my own money, can my friends legally give me money to add to my portfolio and have me trade their money for them, in my own account?

well there just college kids, i'm not talking about alot, just each throwing me something like $1,000 to play with for them....not a serious investment

Answer 1

Sort of. It all depends on intentions, expectations, and some numbers--like how many friends and how much money.

First, the account is yours, as you described, so the profits are yours and the tax liabilities are yours.

A couple of buddies passing a couple c-notes your way is essentially a loan, or possibly a gift. Now if you bought a bunch of 5 cent stock and it rose to 5 bucks, I expect your friends will want a substantial piece of that pie when you sell. You will have to be very transparent with them on things like taxes. If the amount of the gift or loans were something like thousands, then you better have some stuff on paper or you may be spending a bundle on lawyers down the road.

There are two things to consider meanwhile. The securities and exchange commission has a mechanism for dealing with people who handle money for the trading of securities, and if you have a single-digit number of "friends", you might slip under the door of their scrutiny. Yet, your brokerage might have some concern and say over things as well. You might be inviolation of your brokerage agreement. Run afowl of either of these and, again, you'll be spending some substantial money to a lawyer.

Finally, if the "friends" are funneling multiple thousands, if not millions, for you to work with in your own account, then--to borrow a line from Shakespeare--'Something is rotten in Denmark'. You may be, intended or not, the patsy for some money laundering. Check out the dated but still good flick Wall Street (Michael Douglas, Sheen and Sheen). Someone might be wanting to put some cuffs on you before the venture is over.

In conclusion, keep it small, keep it infrequent, keep it quiet, and keep crystal clear notes, or better still, keep away from it.

Answer 2

Being how you are very young and can afford to take risks investing in a market index fund such as SPY is the best way to go. This will give you returns that are basically equal to what the S&P 500 does over the same time. I would say this is a better investment then just throwing the money in a savings account because history have shown that over time the markets will be out the interest percent that you will see from a savings account or from bonds.

Answer 3

Start an investment club between all of you. They're usually set up as partnerships. That way all profits and losses and taxes are separated out with a K-1 form at the end of the year. It should not be very expensive. Just some extra paperwork. But well worth it to keep things straight.

Answer 4

I just saw you additional note. Nope, don't do it. It may get messy and well meaning as you are, the risks that come form doing this would mean that you should be taking a fairly huge fee to pay for contingencies thereby reducing the returns that you can generate for your friends. As someone above says, friends and money don't mix well (unless you are ALL very savvy with money, TOTALLY get the risks and can afford to lose it all and more).

Anyway, assuming that you were talking about bigger money investors the answer below holds true but probably not in your case, sorry.

You can. A limited partnership is how I have arranged things so that my wife and I run a company that acts as the general partner in the Limited partnership. We make all of the investment decisions on behalf of the LP and as our people want to withdraw money we pay them and adjust their holding accordingly.

We can do this very liquidly as we use FX traders to generate returns. If you were running a buy and hold stock pottfolio (like a do-it-yourslef mutual fund) you would possibly have issues with liquidity at the point that someone wanted to make a withdrawal.

Our lawyer charged us about $8K CDN when all was said and done for the paperwork to set up the LP which I feel was great value, you may get it done for $5K but you tend to get what you pay for.

So you could open an etrade account on behalf of your LP and trade your friend's money that way and by keeping it separate from your money you aren't liable for taxes directly. Each partner is personally liable for their own taxes when they withdraw funds. You would however need to speak to a tax lawyer about whether the returns to your pals were classed as income as they would be if they traded themselves or Capital Gains as they would be in a recognised mutual fund. In our case it's Capital Gains which is better.

You will probably also be restricted to whom you can invite, in our case it has to be close family (parents, siblings, grandparents and aunts/uncles) and close business associates (those with whom you have previously held significant business relationships). These rules can be flexed slightly but put it this way, a drinking buddy doesn't count and your best mate's sister certainly doesn't count. This is to protect them from scam artists (you aren't one from the sound of it but you could easily be if there weren't rules to stop you). Tell them when they qualify as an accredited investor ($1M of net assets) they can talk to you again.

Answer 5

you need to identify and segregate these funds from friends or you will be personally liable for the taxes on any profits. Also, if there are losses, how would they claim credit on a 1040 for the capital loss ? You CAN legally do this any way you like, but I would have WRITTEN agreements with those friends covering all contingencies, including brokerage fees, taxes, etc.

Answer 6

Sure they can, but you're responsible for taxes on any earnings you make with their money. Even if you give them all the earnings. The reason so few people do stuff like this is because of the bookkeeping headaches involved.

Answer 7

Tell them to open their own accounts and charge them for investment advice if they need it. It's much safer than you having their money and dealing with all the potential tax and liability issues if something goes wrong.

Answer 8

YES...BUT it could get crazy when its time to pull the money out. Worst case you could loose it all! When you cash out YOU will have to pay the taxes then split the rest up.
Friends and money don't mix well,
Like a good cocktail! : )

Answer 9

Extremely curious about the answer to this