Author Topic: Giving financial advice to others  (Read 5741 times)

ajaxlupis

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Giving financial advice to others
« on: March 03, 2014, 12:07:20 PM »
As a committed mustachian, I manage all my investments on a DIY basis.  When I talk to a lot of friends, coworkers, etc., the subject sometimes turns to investing and finances.  A lot of these people are highly educated, very smart, and make good incomes, yet their investment landscape is a nightmare--they keep all their money in their checking account "because they don't know where to put it", don't max out their 401(k) or participate in other company investment programs, etc.

Sometimes they ask me what I do and they get an appreciation for how complex it can be to do it right, using the proper types of accounts (regular IRA versus roth IRA, using 401(k), 529 for kid's education, etc.).  They'll say, "I wish I spent as much time on my finances are you are, because it's clear I'm probably leaving money on the table, but I just don't have the time or interest."

A few ask if I would ever be willing/able to look at their finances and see if there are ways to improve that.  I'm happy to do that, but if this turns into something that becomes really time consuming, I would like to be compensated.  If I was to offer financial advice like what mutual funds to use, which types of accounts to open, where to put the money first, what types of licenses if any would I need?  I've done a little research and I know there are series 6 and series 7 licenses, but do I need that if I offer a simple fee for service like: "I'll look over your investments and tell you what I would do for $500"?

Any comments or insights would be greatly appreciated.

Undecided

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Re: Giving financial advice to others
« Reply #1 on: March 03, 2014, 12:26:04 PM »
Look at your state law requirements and the series 65 exam.

the fixer

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Re: Giving financial advice to others
« Reply #2 on: March 03, 2014, 12:35:27 PM »
I've done a little research and I know there are series 6 and series 7 licenses, but do I need that if I offer a simple fee for service like: "I'll look over your investments and tell you what I would do for $500"?
YES. The requirements vary by state. I only know about Washington: The Washington Division of Securities regulates it and requires you to pass the Series 65 before offering any paid financial advice.

Costs in WA:
$155 to register to take the test
~$20 to buy the study materials on ebay
$150 registration fee for a license

Be warned that the Series 65 contains lots of questions about investment products that Mustachians would normally never pay any attention to: margin accounts, options trading, futures, etc. You will also need to know a lot of ins-and-outs of various retirement plans you may not have (SIMPLE IRAs) or retirement rules that you haven't bothered to research yet because they don't affect you right now (when to claim social security and how that affects your benefits, RMDs on traditional IRAs/401ks, etc.)

As for whether or not you should do it: if you think you have a solid market, by all means go for it! Be warned, though, that many people are making irrational, emotion-based decisions with their money and will continue to do so when it comes to selecting a financial advisor. You may know a ton about investing, but that doesn't mean they will listen to you; people want financial advisors with lots of sales-type skills to tell them what they should do. You need to be able to deliver on this expectation of your behavior in order to be successful.

Numbers Man

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Re: Giving financial advice to others
« Reply #3 on: March 03, 2014, 12:35:41 PM »
Just recommend some good books to read.

schimt

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Re: Giving financial advice to others
« Reply #4 on: March 03, 2014, 12:57:50 PM »
Just recommend some good books to read.

there is a very small percentage of people that will read an entire book on personal finance (not including mustachians). I have friends who have asked me some investing questions and i can't even get them to read Jim Collins Stock Series, which is a great short summary.

SMH...

Numbers Man

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Re: Giving financial advice to others
« Reply #5 on: March 03, 2014, 01:47:07 PM »
Just recommend some good books to read.

there is a very small percentage of people that will read an entire book on personal finance (not including mustachians). I have friends who have asked me some investing questions and i can't even get them to read Jim Collins Stock Series, which is a great short summary.

SMH...

The the old saying "That you can only lead a horse to water" popped into my head.

MDM

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Re: Giving financial advice to others
« Reply #6 on: March 03, 2014, 03:15:03 PM »
Yes, state requirements vary so check yours.  E.g., for Michigan one pertinent site is http://www.legislature.mi.gov/(S(i0dyve45gpchmm55zxpijm55))/mileg.aspx?page=getObject&objectName=mcl-451-2403&highlight=securities

Excerpts from that page include
(1) A person shall not transact business in this state as an investment adviser unless the person is registered under this act as an investment adviser or is exempt from registration as an investment adviser under subsection (2). 

In other words, yes you have to be licensed unless, for example:
"...(c) A person that does not hold itself out to the general public as an investment adviser and that has had, during the preceding 12 months and in addition to those described in subdivision (a), not more than 5 clients who are natural persons, who are residents of this state, and who are accredited investors as defined in rule 501(a) under the securities act of 1933, 17 CFR 230.501...." 

You can read more about "rule 501(a)" at http://www.mitchell-attorneys.com/legal-articles/accredited-investors/.

In short, it seems that the Michigan government wants to require you to pay them money for the privilege of giving financial advice.  In return, the state government will certify to the general population that you have passed a test.  You are, however, allowed to advise a handful ("not more than 5") of high income or high net worth people without getting a license.  The presumption is that those well-to-do folks should be smart enough to know if you are giving good advice, and if not, well, that's their problem.

I suspect other states have similar laws, but was intrigued enough by your question to see how it would apply locally.

Eric

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Re: Giving financial advice to others
« Reply #7 on: March 03, 2014, 04:00:40 PM »
This just screams "BAD IDEA" to me.  They're your friends and coworkers.  What happens when you charge them for your advice, they invest as recommended, and then the market drops 20%?  Will they still be friends after that?  Will they be pissed at you and make your job unbearable?  If they are already weary of investing, they're not going to know to hold the line.  They're going to sell and then think you're a dick for losing them money.  And your gain is going to be minimal.  If you don't want to give friendly free advice, I think I'd skip it.

the fixer

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Re: Giving financial advice to others
« Reply #8 on: March 03, 2014, 05:42:09 PM »
This just screams "BAD IDEA" to me.  They're your friends and coworkers.  What happens when you charge them for your advice, they invest as recommended, and then the market drops 20%?  Will they still be friends after that?  Will they be pissed at you and make your job unbearable?  If they are already weary of investing, they're not going to know to hold the line.  They're going to sell and then think you're a dick for losing them money.  And your gain is going to be minimal.  If you don't want to give friendly free advice, I think I'd skip it.
In my opinion this is fearmongering. I have seen people make very bad investment decisions but still trust their advisor as all-knowing and amazing. People think of advisors as this special person they happen to know, better than anyone else out there at what they do. The relationship is not built based on the rate of return they get, it's a sales thing as I said above. A lot of the tactics can be viewed as slimy, but they shift blame and keep the client coming back: blaming other factors you couldn't possibly be expected to predict, defending yourself with claims that you just have to wait it out, I've even heard an advisor tell me that you can't judge a fund's manager by his past performance and just have to wait longer! See also http://www.cxoadvisory.com/investing-demons/#defense for similar lines of reasoning, which actually work to some extent on people.

This is why so many financial advisors can essentially scam people out of their money by putting it in high-cost, high-commission investments and have no fiduciary obligation. If you can use the same techniques to build the client relationship, but give good advice as a fiduciary without conflicts of interest, you can definitely make a bit of money and improve the world a bit. The only reason I'm not doing this is because I don't have what it takes to be such a salesman.

Eric

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Re: Giving financial advice to others
« Reply #9 on: March 03, 2014, 06:05:52 PM »
I have seen people make very bad investment decisions but still trust their advisor as all-knowing and amazing. People think of advisors as this special person they happen to know, better than anyone else out there at what they do.

But I'm guessing that all of those people were professional advisers, as in that's their day job.  I think it's different when your coworker or friend charges you for their investing advice.  Maybe not though.  Something for the OP to consider at least.

ch12

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Re: Giving financial advice to others
« Reply #10 on: March 03, 2014, 09:28:01 PM »
Just recommend some good books to read.

there is a very small percentage of people that will read an entire book on personal finance (not including mustachians). I have friends who have asked me some investing questions and i can't even get them to read Jim Collins Stock Series, which is a great short summary.

SMH...

The the old saying "That you can only lead a horse to water" popped into my head.

If they are so lazy and uninterested in money that they are leaving free money like a 401k match on the table and not saving for their kids' college educations in a 529, the chances of them reading good books is slim. If only that was the answer...

I'd say spring for the license. It'll be a nice sideline. I might look into that one day. One of my friends is a financial advisor for Merrill Lynch, and she does ok.

Nords

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Re: Giving financial advice to others
« Reply #11 on: March 03, 2014, 09:38:40 PM »
A few ask if I would ever be willing/able to look at their finances and see if there are ways to improve that.  I'm happy to do that, but if this turns into something that becomes really time consuming, I would like to be compensated.  If I was to offer financial advice like what mutual funds to use, which types of accounts to open, where to put the money first, what types of licenses if any would I need?  I've done a little research and I know there are series 6 and series 7 licenses, but do I need that if I offer a simple fee for service like: "I'll look over your investments and tell you what I would do for $500"?
Any comments or insights would be greatly appreciated.
You could start a blog and treat their questions as generic case studies.  You'd also be able to refer questions to your blog, where you might be able to turn them into new case studies.

You'll also be able to run Google AdSense on the blog, as well as individual ads and affiliate links.  That way you can earn money without having to directly bill your friends, which neatly avoids that sticky "legal advice & liability" issue.

soccerluvof4

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Re: Giving financial advice to others
« Reply #12 on: March 04, 2014, 07:44:56 AM »
^+1 or you could just refer them here.  I agree it sounds like there just lazy and dont want to do the work themselves and probably just think about it every once in awhile.