If you're talking about your investing strategies—and showing signs of success—you're likely the go-to person among your friends when it comes to financial questions. Meaning, if you're financial savvy, people who know you might view you as a very valuable commodity—a potential free money manager.
Key Takeaways
- When starting a financial advisory business, it can be difficult to get your first set of clients.
- It may be tempting to start managing money for friends and family, but beware the negatives that can come from doing so.
- If you lose your friend's money—or they take legal action against—it can result in more than just a ruined friendship.
- A better strategy might be referring friends to other professionals in your network and educate them on personal finances.
Issues With Investing for Friends
Investing other people's money might seem simple enough, but it does bring a number of complications.
Unrealistic Expectations
The friend of yours who thinks 35% returns this year are going to happen next year as well might be in for a nasty surprise if your stock picks make next to nothing. When you invest for friends, you have to deal with unrealistic expectations that can put a damper on a relationship.
If your friends want you to invest for them, they might not understand all of the risks involved with investing, including not hitting projected investment goals.
Losing Money
Not meeting a friend's investing expectations may jeopardize your friendship, but falling short of your friend's projected returns could make things worse. Managing and explaining losses can be tough when there's a friendship involved.
Do you tell the friend to suck it up? Do you make the person whole out of your pocket? Do you try to make up the difference with new picks? There isn't a perfect way to deal with losing a friend's money and you should consider this risk before you agree to invest for anyone.
Legal Matters
By managing a friend's money, you may be breaking the law. Investment professionals must be registered with the Securities and Exchange Commission (SEC) or the state in which they operate. They are regulated by governments and by trade organizations like the Financial Industry Regulatory Authority (FINRA) for the protection of consumers.
If you invest for a friend for compensation, you could be breaking laws that are in place to protect investors from people who aren't qualified to have discretionary control over others' accounts.
Short End of the Stick
To avoid registration and costly licenses, you decide to invest your friends' money for free. If that's the case, you will need to consider whether your friend is taking advantage of you. Helping out a friend is nice, but when that help consists of making money for that person and getting little or nothing in return, you might be suffering from an off-balance relationship.
What Can You Do for Friends
Note that there are still things that you can do to help your friends with investing without burdening yourself with the substantial responsibility of investing someone else's money. One of the best ways to lend a hand is to teach your friend about investing.
Help Them Learn
There are a lot of pitfalls out there for new investors. If you're lucky, you've been able to avoid quite a few of them or you learned how you should have gone about avoiding them.
The benefit of your experience can be a great asset to pass on to a friend and it won't cost either one of you personally or financially. Therefore, if you want to help your friends, work with them—show them how to analyze a financial statement, how to execute a trade online, or how to find online resources.
Investment Clubs
There is a popular way to invest hands-on with friends without taking on the responsibility of an investment advisor—an investment club. Investment clubs consist of a group of people who vote to decide whether or not to buy or sell their group-owned investments.
Investment clubs are useful because they allow a more personal approach with actual investments versus just helping someone with investing concepts. These clubs will also give you a vested interest in the performance of your friend's portfolio.
If you're interested in starting an investment club, there are many resources available, ranging from your broker to the internet. It's important to recognize that an investment club isn't just a couple of people who want to invest together—it's a formal (and legally defined) organization with members who have an equitable claim to the assets. This means you should look into the rules and laws that govern investment clubs where you live before joining or starting one yourself.
Can You Legally Invest Other People’s Money?
Yes, but if you plan to invest other people’s money you’ll need the proper licenses. You may also need to be registered with the Securities and Exchange Commission.
What License Do You Need to Invest Other People’s Money?
Overall, to invest other people’s money means you need to be a registered investment adviser with the state or Securities & Exchange Commission (SEC). This includes licensing from the Financial Industry Regulatory Authority (FINRA).
What Is It Called When You Invest Other People’s Money?
Investing other people’s money (OPM) is a term used in real estate investing. Using other people’s money is often referred to as leverage.
The Bottom Line
Investing for a friend usually isn't worth the amount of trouble it can cause. Money just isn't something you want to bring into a good friendship. In the end, by helping your friends invest on their own, you'll be doing them—and yourself—a much bigger favor.
