Investing other people’s money can be a great way to grow your capital, but it also comes with major legal and ethical responsibilities. This article will explore the proper legal structures that allow you to invest funds on behalf of others, the fiduciary duties involved, and tips for mitigating risks. With the right framework, investing other people’s money can benefit both parties through transparent fee structures, alignment of incentives, and shared upside.
Becoming an SEC-registered investment advisor allows you to legally invest other people’s money
The simplest legal structure for investing other people’s money is to become an SEC-registered investment advisor (RIA). This involves registering with the Securities and Exchange Commission (SEC), which allows you to provide investment advice and portfolio management services for a fee. As an RIA, you have a fiduciary duty to act in your clients’ best interests at all times when managing their money. You must disclose your fee structure, credentials, investment strategies, and any potential conflicts of interest. Your activities will be governed by the Investment Advisers Act of 1940. This is the cleanest structure for directly investing other people’s money in stocks, bonds, funds, and other securities.
Forming a private fund structure like a hedge fund or private equity fund pools other people’s money for investing
Many professional money managers utilize private fund structures to invest other people’s money. This includes private equity funds, venture capital funds, hedge funds, and real estate funds. These operate by pooling money from multiple investors into a single investment fund that is managed by the fund manager. Investors become limited partners in the fund, while the manager serves as general partner. This structure requires extensive disclosures and compliance under SEC regulations. The manager must hold a Series 7 and 63 license and file Form ADV. The fund itself must be registered with the SEC. This allows accredited investors to invest in alternatives like private companies, complex trading strategies, and other assets not available in public markets.
Acting as trustee of a trust account allows you to invest trust assets on behalf of beneficiaries
Another way to legally invest other people’s money is by serving as trustee of a trust account. Trusts are legal entities that allow a trustor to transfer assets to a trustee, who then manages those assets on behalf of the beneficiaries. As trustee, you have fiduciary duties to act in the best interests of beneficiaries and follow the terms of the trust. You must avoid self-dealing and conflicts of interest. Trusts can be complex, so it’s critical to have a detailed trust agreement spelling out your powers, limitations, and responsibilities as trustee. Trust assets may include stocks, bonds, real estate, businesses, and other property meant to generate income for beneficiaries.
Robo-advisors provide turnkey online platforms for investing other people’s money
For those who don’t want the burden of hands-on investment management, robo-advisor platforms provide turnkey solutions. Robo-advisors like Betterment, Wealthfront, and Ellevest let clients open investment accounts online and rely on computer algorithms to invest their money. As a robo-advisor, you simply develop the automated investment methodology and technology platform. Client onboarding, portfolio management, trades, rebalancing, and reporting are handled automatically. This can be a scalable way to invest other people’s money if you have programming and quantitative finance skills. Robos act as registered investment advisors with fiduciary duties to clients.
With the right legal structure like an RIA, private fund, trust, or robo-advisor, you can properly invest other people’s money as a service. The keys are transparency, fiduciary duty, and putting your clients’ interests first. Take the time to understand regulations, requirements, risks, and your ethical responsibilities when handling other people’s hard-earned money.