Is It Legal to Hire Someone to Trade Stocks for You?

Yes, it is legal to hire someone to trade stocks on your behalf, but there are several important considerations and requirements to keep in mind to ensure that the arrangement is in compliance with securities regulations.

Legal Framework for Hiring a Professional to Manage Your Portfolio

Investment management in the United States is heavily regulated by entities such as the Securities and Exchange Commission (SEC). To hire a professional to manage your portfolio, the individual or institution must be a registered investment advisor (RIA), and they must follow specific rules set by the SEC.

For instance, if you decide to hire an RIA, the individual must work under an investment advisory firm, which is registered with either the SEC or a state regulatory body. Alternatively, you can allow a friend or relative to manage your trading account, as long as they fit within the SEC’s definition of a ‘Relatives and Friends’ rule. This rule permits individuals to manage your account directly as long as you consent to it, and they are limited to managing the accounts of up to 15 relatives and friends in total. Compensation can be provided to these individuals, but they are not permitted to advertise their services.

Key Considerations When Hiring a Trader

The success of hiring a professional trader largely hinges on the individual’s ability and past performance, but there are several critical factors to consider:

Legal Complyance: Ensure the professional is licensed and registered as an RIA. A registered investment advisor has passed the necessary exams, such as the Series 7 or 63, and complies with SEC regulations. Conflict of Interest: Beware of conflicts of interest. Commission-based advisors have an incentive to generate more trades, which may not always be in your best interest. Look for a fee-only advisor to ensure there are no hidden agendas. Transparency: You should be able to communicate with your advisor and ask questions that you can understand. Technical jargon should be minimized, allowing you to make informed decisions. Account Management: Compliance with the SEC’s ‘Relatives and Friends’ rule allows friends or relatives to manage your account, but they must not exceed the 15-person limit and cannot advertise or promote their services. Regular Monitoring: While you can hire someone to manage your portfolio, regular monitoring and communication are essential to ensure you're making informed decisions and your advisor is adhering to best practices.

Day Trading vs. Long-Term Management

Day trading is notoriously difficult and not a reliable path to consistent profits. Unless you are an experienced trader, even a professional trader may not consistently generate profits. Trading in such a manner is often more costly due to higher transaction fees and the risk of frequent trades.

It is important to understand that hiring someone to manage your trades does not guarantee higher returns. Instead, consider the value and expertise you are gaining from the professional.

Conclusion

Hiring a professional to trade stocks for you can be a viable option for those who lack the time or experience to manage their own portfolio. However, it is crucial to research potential advisors, understand the legal requirements, and consider the associated costs and conflicts of interest.

To ensure a successful and legally compliant arrangement, always prioritize due diligence and transparency. By making informed decisions, you can maximize the benefits of professional management while minimizing risks.