Managing OPM

I have been managing money for two UHNW investors for one year now using online brokerages. They approached me a year ago about this and entrusted me with $150,000 – with the promise of more if I turned out to know what I was doing.
I know that at least one of these investors had hoped I would be more of a “swing for the fences” money manager, but I kept things pretty conservative and made 10% while the S&P 500 lost 10% in the same time period.
I won’t go into my investing and trading strategies, but it was 100% long equities for the year. I just went the TDAmeritrade/Etrade/Scottrade route to keep things simple, and I’d like to keep things that way.
But I need to know that I’m doing things the proper way - and I am hoping that at least a few of you could help me with this. The way the accounts were set up online was just as brokerage accounts in each investor’s name. I was then paid a performance fee on any return I generated for them above the S&P 500. The 10% gain over the past year would have been closer to 17% without factoring in commissions and performance fees.
In the past week, however, I have been contacted by another potential investor. I feel like I need a more organized structure in place for all of this. Any thoughts?

 

You are into a number of issues that require you to consult with a good securities attorney. Coming here for advice won't help.

I suggest you do that before you take on any new money. You can easily get yourself in a world of hurt if things aren't done properly.

You are not at the point yet where you need to register as an investment advisor, but you at least need guidance on drafting a good agreement that will cover you until such time as you do need to register. (At that point you'll need a series 65 license, and tons of paperwork.)

A good attorney will advise you on when you do need to think about registering, and what kind of structure to put together.

These are all complex subjects that touch on both state and federal regulations.

Regarding your brokerage, IB has a nice advisor setup where your clients will open individual accounts and you control them with a master, into which you enter trades. It is a pain to set up, but well worth the effort once you get it competed and get the hang of order entry.

 

Congrats on the 10% vs. the -10% SPX!

And, I agree 110% with lindq. You absolutely need to talk to a SECURITIES Attorney.

And, IB would be a good choice. You'll be glad you did it when you bring in more money. i.e., less headache.

I'm a Series 7 Broker and 66 for fee-based business going through a B/D and RIA on a 95% payout. It's very much worth it to me to have a Compliance guy in the office who keeps me out of the regulatory radar by answering my questions as they come up.

Big Firm Compliance = not much help
Independent Firm Compliance = usually night and day difference.


You may want to call your State Administrator's office, and tell them, "I'm thinking about doing _____, and need to know the requirements involved." DO NOT tell them you're already doing it! Tell them your name is Joe Smith too. LOL!