Setting up a managed fund

[markumansky]

I am looking to set up a structure whereby my friends (max 20) can invest their money into my trading account and receive returns based on profits/losses made in my trading account. As such I was wondering if anyone is currently managing other people’s money (max. 20 clients) and wouldn’t mind sharing information with me on how they set up the fund, what structure they use, what documentation requirements exists, how they calculating unit prices, what fees they charge, etc....

Thank in advance and I look forward to hearing from anyone soon.

Mark

 

[McLovin]

I don't have any experience with doing this...but.

I assume you're saying max of 20 people to get around the requirement of having an AFSL? If that's the case then I'd be careful because although you may not need an AFSL, the reporting requirements are still the same as for any investment scheme, as I understand. If you intend on offering to "retail" investors (as defined by the Corporations Act) then my understanding (and I'm happy to be corrected) is that you will still need a PDS, as opposed to offering to "sophisticated" investors who only require an IM.

Depending on how much money will be in the pot you may end up finding that the ongoing costs of operating the unit trust make it uneconomic. If you're thinking you'll get 20 of your best mates to tip $10k in then this will certainly be the case. You could look into using a company structure but depending on the individual tax circumstances of your potential shareholder/s it may mean they are paying significantly more in tax.

My own opinion is that under no circumstances you use your own trading account and have your mates tip their cash into it. For one thing you will create a huge tax mess for yourself and your friends.

You need a lawyer.

 

[markumansky]

Hi McLvin;

Thanks for your comments. They are much appreciated and just as i originally thought. I do not plan offering to "retail" investors, most likely it will be more towards "sophisticated" investors &/or "friends" wishing to invest.

Obviously the issue of the tax is a major hurdle, just don't know how to get around it yet to ensure all are satisfied. One thought i had was simply to distribute profits based on level of investment and let them take care of their own tax liabilities, but for this to occur, a correct structure must be created first.

Any suggestions on who I can talk to about this in Melbourne??

Mark

I don't have any experience with doing this...but.

I assume you're saying max of 20 people to get around the requirement of having an AFSL? If that's the case then I'd be careful because although you may not need an AFSL, the reporting requirements are still the same as for any investment scheme, as I understand. If you intend on offering to "retail" investors (as defined by the Corporations Act) then my understanding (and I'm happy to be corrected) is that you will still need a PDS, as opposed to offering to "sophisticated" investors who only require an IM.

Depending on how much money will be in the pot you may end up finding that the ongoing costs of operating the unit trust make it uneconomic. If you're thinking you'll get 20 of your best mates to tip $10k in then this will certainly be the case. You could look into using a company structure but depending on the individual tax circumstances of your potential shareholder/s it may mean they are paying significantly more in tax.

My own opinion is that under no circumstances you use your own trading account and have your mates tip their cash into it. For one thing you will create a huge tax mess for yourself and your friends.

You need a lawyer.

 

[skc]

This may be something you can investigate. It's not scalable and it's more US-centric than Australia - so you need to check with your own legal/financial advisors to see if you are allowed to do this.

http://www.interactivebrokers.com/en/p.php?f=friendsFamilyAccounts

And here's a story to remind you what you shouldn't be doing.

http://www.smh.com.au/business/boy-blunders-59m-bad-deal-20100831-14c04.html

 

[Trembling Hand]

The easiest way to do it and safest way for your "clients" is as Skc has already posted is to set up an advisor account with IB.

That way all money stays in individual names. They get 100% control over withdrawals. Then you just trade 1 master account which automatically feeds down to the sub accounts. Great set up.

 

[village idiot]

I have one of those advisor accounts with IB, just used for my own accounts (2 personal and 1 super). I love it beacuse you just log on once and can then flick between accounts.
I dont use the 'one trade allocated over multiple accounts' thing, but it would be ideal for the OP's purposes.

But why would you be able to do that for a few mates legally without having an AFSL? Surely controlling someone elses account without having a licence is offence no. 1?

 

[markumansky]

Thanks everyone for your great suggestions and prudent advice.

Much appreciated!!!

This may be something you can investigate. It's not scalable and it's more US-centric than Australia - so you need to check with your own legal/financial advisors to see if you are allowed to do this.

http://www.interactivebrokers.com/en/p.php?f=friendsFamilyAccounts

And here's a story to remind you what you shouldn't be doing.

http://www.smh.com.au/business/boy-blunders-59m-bad-deal-20100831-14c04.html

The easiest way to do it and safest way for your "clients" is as Skc has already posted is to set up an advisor account with IB.

That way all money stays in individual names. They get 100% control over withdrawals. Then you just trade 1 master account which automatically feeds down to the sub accounts. Great set up.

I have one of those advisor accounts with IB, just used for my own accounts (2 personal and 1 super). I love it beacuse you just log on once and can then flick between accounts.
I dont use the 'one trade allocated over multiple accounts' thing, but it would be ideal for the OP's purposes.

But why would you be able to do that for a few mates legally without having an AFSL? Surely controlling someone elses account without having a licence is offence no. 1?

 

[prawn_86]

But why would you be able to do that for a few mates legally without having an AFSL? Surely controlling someone elses account without having a licence is offence no. 1?

I think it comes under just a basic personal agreement. As long as you are not giving advice per se then i dont see it as being any different to me giving you $100 to go and place a bet, or buy a car for me etc etc

I could be wrong though

 

[markumansky]

That's what I thought, but based on comments here, i guess its not so simple when it comes to investing.

Mark

I think it comes under just a basic personal agreement. As long as you are not giving advice per se then i dont see it as being any different to me giving you $100 to go and place a bet, or buy a car for me etc etc

I could be wrong though

 

[village idiot]

I havent read the Corporations Act but from what I understand an AFSL is required , not just for giving financial advice but for a raft of other things including 'dealing in a financial product' as a financial service, which sounds like it covers what you propose.

I havent seen anything mentioning an exemption for that for less than 20 people. The 20 person max exemption seems to apply to whether or not a managed fund has to be registered with ASIC. Not having to register the fund with ASIC does not necessarily equal not having to have an AFSL for the person involved. ( I am speculating here rather than stating facts)

Having said that, I am no expert in the field, and I am sure there are people here who are more full bottle on it than me.

 

[markumansky]

Point well taken, Thanks!

I havent read the Corporations Act but from what I understand an AFSL is required , not just for giving financial advice but for a raft of other things including 'dealing in a financial product' as a financial service, which sounds like it covers what you propose.

I havent seen anything mentioning an exemption for that for less than 20 people. The 20 person max exemption seems to apply to whether or not a managed fund has to be registered with ASIC. Not having to register the fund with ASIC does not necessarily equal not having to have an AFSL for the person involved. ( I am speculating here rather than stating facts)

Having said that, I am no expert in the field, and I am sure there are people here who are more full bottle on it than me.

 

[Trembling Hand]

I havent read the Corporations Act but from what I understand an AFSL is required , not just for giving financial advice but for a raft of other things including 'dealing in a financial product' as a financial service, which sounds like it covers what you propose.

I havent seen anything mentioning an exemption for that for less than 20 people. The 20 person max exemption seems to apply to whether or not a managed fund has to be registered with ASIC. Not having to register the fund with ASIC does not necessarily equal not having to have an AFSL for the person involved. ( I am speculating here rather than stating facts)

Having said that, I am no expert in the field, and I am sure there are people here who are more full bottle on it than me.

Nah thats not correct. If you are seeking investors for a company and you are issuing a prospectus to more than 20 people you need to jump through all the regulation hoops. If its under 20 you don't as long as you are being honest.

You can set up a hedge fund structure and seek sophisticated investors and you also don't need to be registered.

There are lots of ways to go about it without having to have a AFSL or be registered with ASIC. Thats all pretty easy.

The hard bit is actually not kidding yourself that the reason you need the money is because you cannot make $$'s with your own. trust me its a lot more pressure trading a few mil of OPM.

 

[village idiot]

You can set up a hedge fund structure and seek sophisticated investors and you also don't need to be registered.

There are lots of ways to go about it without having to have a AFSL or be registered with ASIC. Thats all pretty easy.

ok, thanks. you got any links to have a read about it?

 

[adt100]

By the time you are done even a basic hedge fund structure is going to cost you 60-100k and possibly more. Unrealistic for most.

With regards to the need for and ALSL the law in very clear but the enforcement of it is not. The law states that any business in Australia carrying out a financial services business needs an AFSL. It is a sweep all statement with no definition as to what constitutes a financial services business. Having taken legal advice in this area I have an AFSL even though my company does not directly deal with any Australian clients itself and only Sophisticated Investors and wholesale clients at that. I do however have a financial services company that conducts its business in Australia (I live here). Now ASIC does not enforce this law (or seem too) for many types of business such as newsletters etc. However my legal advice has been quite clear that although enforcement is grey the actual law is black and white. Of course are you likely to ever be found out? That is your risk but I do strongly suggest that you get your own legal advice from a proper financial service specialist lawyer and not from a forum. Having run business in these areas (UK based) for 15 years falling foul of the regulator and law is something I have a low risk tolerance for.

Now the kicker your own AFSL costs a fortune too!! Best bet would be to find an AFSL license holder and become an AR of them.

You could run an Investment Club (look it up can’t remember the specifics) however you would need to be RG146 compliant (assuming you lead most the decisions) and hold regular meetings and clearly document that the decision making was shared. Not suitable for short term trading therefore. I don’t believe an AFSL is then required but I am a business owner not a lawyer and so will not pretend to know all the ins and outs.

I am however concerned that many of the comments above underestimate strictness of the Australian Regulatory regime.

I would suggest you best plan might be to get game plan together and find a friendly broker who may be prepared to run your operation through them if it has any scale for them

Good luck with your endeavours

 

[markumansky]

Thanks everyone for your input. It all sounds too complicated, especially when all I want is to trade my account, never (!) provide any advise and seek up to 20 sophisticated investors/friends to inject additional funds into the account to enable greater $ returns.

Thanks again!!

By the time you are done even a basic hedge fund structure is going to cost you 60-100k and possibly more. Unrealistic for most.

With regards to the need for and ALSL the law in very clear but the enforcement of it is not. The law states that any business in Australia carrying out a financial services business needs an AFSL. It is a sweep all statement with no definition as to what constitutes a financial services business. Having taken legal advice in this area I have an AFSL even though my company does not directly deal with any Australian clients itself and only Sophisticated Investors and wholesale clients at that. I do however have a financial services company that conducts its business in Australia (I live here). Now ASIC does not enforce this law (or seem too) for many types of business such as newsletters etc. However my legal advice has been quite clear that although enforcement is grey the actual law is black and white. Of course are you likely to ever be found out? That is your risk but I do strongly suggest that you get your own legal advice from a proper financial service specialist lawyer and not from a forum. Having run business in these areas (UK based) for 15 years falling foul of the regulator and law is something I have a low risk tolerance for.

Now the kicker your own AFSL costs a fortune too!! Best bet would be to find an AFSL license holder and become an AR of them.

You could run an Investment Club (look it up can’t remember the specifics) however you would need to be RG146 compliant (assuming you lead most the decisions) and hold regular meetings and clearly document that the decision making was shared. Not suitable for short term trading therefore. I don’t believe an AFSL is then required but I am a business owner not a lawyer and so will not pretend to know all the ins and outs.

I am however concerned that many of the comments above underestimate strictness of the Australian Regulatory regime.

I would suggest you best plan might be to get game plan together and find a friendly broker who may be prepared to run your operation through them if it has any scale for them

Good luck with your endeavours

ok, thanks. you got any links to have a read about it?

I havent read the Corporations Act but from what I understand an AFSL is required , not just for giving financial advice but for a raft of other things including 'dealing in a financial product' as a financial service, which sounds like it covers what you propose.

I havent seen anything mentioning an exemption for that for less than 20 people. The 20 person max exemption seems to apply to whether or not a managed fund has to be registered with ASIC. Not having to register the fund with ASIC does not necessarily equal not having to have an AFSL for the person involved. ( I am speculating here rather than stating facts)

Having said that, I am no expert in the field, and I am sure there are people here who are more full bottle on it than me.

Nah thats not correct. If you are seeking investors for a company and you are issuing a prospectus to more than 20 people you need to jump through all the regulation hoops. If its under 20 you don't as long as you are being honest.

You can set up a hedge fund structure and seek sophisticated investors and you also don't need to be registered.

There are lots of ways to go about it without having to have a AFSL or be registered with ASIC. Thats all pretty easy.

The hard bit is actually not kidding yourself that the reason you need the money is because you cannot make $$'s with your own. trust me its a lot more pressure trading a few mil of OPM.

 

[prawn_86]

Thanks everyone for your input. It all sounds too complicated, especially when all I want is to trade my account, never (!) provide any advise and seek up to 20 sophisticated investors/friends to inject additional funds into the account to enable greater $ returns.

Thanks again!!

So why dont you just get them to give you a loan for 'personal use' on which you pay a set amount of interest plus a floating amount to account for profits. I'm sure a lawyer could draft up somehting like that.

Once you have the money from a loan like that it is yours to do as you wish as far as i understand. Although i dont know if your friends would be comfortable not having control of their own funds...

PS - do you have a proven strategy with quoteable R:R etc? If so, why not just go work for a prop desk?

 

[skc]

So why dont you just get them to give you a loan for 'personal use' on which you pay a set amount of interest plus a floating amount to account for profits. I'm sure a lawyer could draft up somehting like that.

Once you have the money from a loan like that it is yours to do as you wish as far as i understand. Although i dont know if your friends would be comfortable not having control of their own funds...

PS - do you have a proven strategy with quoteable R:R etc? If so, why not just go work for a prop desk?

Loan is not quite the same unless you include a clause that says something like "Principle re-negotiated in line with trading loss"... otherwise you are just underwriting your friends loss.

If you are only trading family's money, a discretionary family trust is a possible structure. again, see your accountants / lawyer / priest / hairdresser etc etc for proper advice.

 

[mark100]

Any updates on if you pursued this idea further?