Trading others people money

Discussion in 'General Discussion' started by Marcas, Jan 12, 2017.

  1. Marcas

    Marcas Well-Known Member

    I was thinking a little about trading somebody's money, thinking in general.

    There are many aspects that need to be taken into consideration. One of them is responsibility and potential increase in stress level that need to be handled and may affect trading process - in good or bad way. Other thing, maybe should be mentioned in first place, is my, or anybody's in this position, market skills to do the task. One can make a pretty long list. What I'm mostly interested in is non public activity: family, friends.

    When we are taking about $50 there is no problem, but if we taking 50K+ some issues emerge. What is best way to handle such. Just let them open account, get password and start trading? is it legal? Seems like a lot of work and opens doors for mistakes. What about taking a personal loan? I write a note and start paying back interest. In this case each side takes care of own taxes. What about starting partnership? When Buffet started his business he was setting private partnership with each person willing to give him money (if I remember correctly)? Seems like a lot of paperwork.

    I know that at least few members of CD do trade others money and would like to gain some insight. Do you care to share your thoughts and experience.
  2. tom

    tom Administrator Staff Member

    Hi Marcas,
    I started trading a friend's account about two years ago. He created a user for me at Interactive Brokers and I logged in and traded for him. I knew him and how he wanted to treat the capital. You need to talk to whoever's account you're trading and find out what they expect and what you expect. Account holders have to be aware of potential risks. If you have a loss you shouldn't be obligated to repay it unless you took excessive risk and disregarded any instructions they gave you. If you follow their guidance and have losses, that's part of the game. You wouldn't expect them to give you the profits if you make money would you?

    I do know of someone who lost 99% of someone's IRA they were trading despite the account holder reminding him that it was an IRA account and to be careful with it as you can't just add lost capital back into the account. That is reckless and should not have happened. This is the type of situation that I would expect the trader to be responsible for at least some of the losses. I'm not an attorney but that's my opinion.

    The bottom line is if you are trading for friends and family, talk to them and agree on how you are going to trade their capital. It wouldn't hurt to have an agreement in writing. Then do your best without taking too much risk.

  3. Steve S

    Steve S Well-Known Member

    Tom's advice is good. I would add that if you are actively trading the account it is safest to have it in something like an IB "FA" account where the broker knows you have all the trading privileges (client has none, zip) and everything is legal and proper. Otherwise ugly things can happen if something goes wrong because you are not really in a legal/proper position to be logging in and making trading decisions. Don't know if you can do that with TOS but with IB it works great, particularly because you can easily allocate to the different accounts in several different ways.

    The loan thing (promissory note) can also work well if it's your mom or something like that, but it gets complicated if you have a bad quarter/year. I have done both things in combination (FA account for trading profits and a promissory note for shifting some incentive fees to myself) and it worked well, but that was when I was making very steady profits with hardly ever a down month.
  4. Marcas

    Marcas Well-Known Member

    Thanks Tom,
    I hear what you say. My line of thinking. I'm not looking to put hand on somebody's money and I wouldn't agree to trade significant portion of person's wealth. I just want give them opportunity to earn little more than on saving account even if risking more. It is very good advice to put everything on paper (there are some people I would not trade with even with that : ) But how to set it up on legal side that there is nothing shady for BigBro - I don't want to worry also about this.

    I promise, I wont treat anything said here as legal or tax advice nor anyone else should : )

  5. Marcas

    Marcas Well-Known Member

    do FA account creates additional problems with taxes? Do you required to have any licenses to do that? I trade couple accounts for myself and it is pain, it is just too complicated for long run, but sure I can do it.
    As per loan. I'm thinking about it as legal setup not as strict contract that will be fulfilled to the letter.
  6. tom

    tom Administrator Staff Member

    At IB, the advisor account is just linked to the client account. The client always has access to their funds. The advisor can give the client trading permissions but like Steve said, that can get ugly. Since you're just trading the client's capital, the client is responsible for any taxes. Of course, if they pay you for managing their money, you have to pay your own tax on that. You don't need any license for friends and family. I think the limit is 15 accounts or $25million, whichever comes first. That's the IB limit. The state you live in may be more restrictive.
  7. Steve S

    Steve S Well-Known Member

    Tom answered your questions ... I didn't mention the setup where you get paid from your client's account - never done that because it can push you into professional status with IB and then your data fees are insane. Regarding loans, it's either a legal contract or it's nothing, and you want it legal for tax purposes (so you can deduct the interest paid) as well as all other reasons.

    Someone else should jump on and talk about how it works with TOS ...
  8. AKJ

    AKJ Well-Known Member

    I'm wondering if members of the community who have seen others succeed/fail and experienced success/failure themselves would opine on how much first-hand trading experience one should have with their own capital before its wise to venture into managing investments for others. I personally lean EXTREMELY conservative on this front, and would probably want to see multiple years of performance through multiple market regimes before I would be comfortable that I have the ability to responsibly manage money for other people.
  9. Gabor Maly

    Gabor Maly Well-Known Member

    I guess another variable is how you handle multiple positions in case you have a few to manage in addition to your own capital once the market puts you under pressure. Which position are you going to adjust first, yours or the clients? A setup where there is one position managed by the advisor while the "clients" or friends receive the profit and loss based on the percentage of capital they put in would take some of the heat off during a crisis.
  10. tom

    tom Administrator Staff Member

    I solve that problem by having my account being linked to the advisor account I'm trading. I like to use SPY/ES to flatten deltas and buy some time. I try to keep most of the accounts with similar positions so the adjustments can be made in larger trades with IB distributing them to each account for me. The accounts are not aggregated like a fund but are all separate accounts, which does make it a little trickier. The Road Trip Trade is slow enough that it's easy to keep things updated.
  11. Bryan Doyle

    Bryan Doyle Well-Known Member

    Tom or anyone, just curious if they pay your for managing your account is the income your receive treated as ordinary income to you or investment income (taxed lower generally). Specifically in the US. Tom I know you are in Germany so your taxes might be different.
  12. Marcas

    Marcas Well-Known Member

    I'm leaning to managing one or two accounts because it is easier. If I would to manage multiples I probably would average across all of them to determinate P/L. Managing single acc is more effective, imho. All will be (if) kept on gentleman agreement level, I even don't want to use term 'clients'. I understand that we are dealing with money and friendship may be at stake so I want to limit myself to relatively small amounts. Notes will serve two purposes: documents source of money and taxes. As I mentioned before this will be only for legal purpose. Real terms will be set in indepth discussion.
    Do I need just to sign note or something else need to be done in that case.

    Did anybody did partnerships?

  13. Steve S

    Steve S Well-Known Member

    I love that nobody is responding to this ... my own method in managing for others is to regularly (at least once per quarter) point out 2 things: (1) Here is exactly how you might lose 20%/50%/100% of all the money in your account due to purely random market events through no fault of my own; (2) Please keep in mind that even the smartest and most experienced money managers are "morons and idiots" relative to Mr. Market - and I'm very, very far from being among the smartest or most experienced. If they want my help after that, they've been adequately forewarned.
    tman and Gabor Maly like this.
  14. Steve S

    Steve S Well-Known Member

    Doing promissory notes is not a big deal at all ... you don't need a lawyer or accountant, just get something like Quicken Legal Business Pro and make sure everything is executed correctly. The interest rate needs to be >= the AFR = Applicable Federal Rate. Document principal and coupon flows well. Don't forget to send 1099s if interest amount is high enough.

    The "real terms" thing is more complicated if they don't have an actual account funded at the right size ... keep in mind that if you do informal "settle-ups" you need to observe gift tax rules, so the amounts can't exceed the gift tax exclusions.
  15. Marcas

    Marcas Well-Known Member

    Thanks, that what I hoped for. Ofc I will talk about this with my accountant when time come.

    : (

    Sure thing.
    This is one way of dealing with 'problem'.
  16. tom

    tom Administrator Staff Member

    Because I'm a U.S. citizen, I'm taxed on my world wide income regardless of where I live so I'm paying U.S. income tax. Any fees collected are ordinary income for a service provided. Because I live outside of the U.S., I do have the $100k foreign earned income credit so I don't pay federal income tax on the first $100k of earned income.
  17. Boomer34

    Boomer34 Well-Known Member

    Great discussion with good insights...

    I have a question regarding fees...say you are trading a family member's there any way to officially/legally, have them pay you a fee (whether % of profit or a flat mgt fee) out of the IRA account? Or would they have to pay you out of a personal account?
  18. tom

    tom Administrator Staff Member

    I know the advisor accounts can do invoicing at IB and the fees are not considered a distribution; however, I think IB will only let you do invoicing if you are licensed.
  19. Marcas

    Marcas Well-Known Member

    Regarding fees on IRA. I don't know either if it is allowed to take fees from IRA but from IRA owner's point of view it makes little sense. One wants to find ways to put more $ into account than ways to withdraw.
    Regarding managing IRA. I would be very careful here. Consider managing small to very small portion of it. If something goes wrong you will be remembered for long time and not necessary the way you may want to be remembered.
  20. ethanscott

    ethanscott Member

    If you go into a trade knowing your risk and you know how to control your risk, you are ahead of the game, big time. A huge rule when trading with margin or when trading in general is, ‘don’t trade money you can’t afford to lose.’ We all know that one!
    I personally use a system called R trading for my swing and day trades. This allows me to focus on controlled risk for my trades, regardless of how much money I’m working with.
    R stands for risk unit. It is a percentage of your account, usually 1%. This is a predetermined risk value that traders could use for each and every trade.

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