Buying shares with a friend - Implications

[hotchy]

I am an accounting student and have been following the stock market for a few years but have finally decided to jump in.

I mentioned this to my friend and he is keen to get into the market too. He wants to do the same as I do (ie if I buy 100 shares in "Y", he will buy 100 shares in "Y". The only thing is, he doesn't know much about the market.

As I have learned during my studies and as a junior accountant, giving financial advice can get you into some serious trouble if you don't have a licence. I've been told that if it went belly up, and my friend wanted to sue me, he would have that option as technically I am giving him advice.

My boss mentioned using a partnership structure to protect me. There would be no borrowing so no liability. We would contribute the same amounts. If we disagreed on a company, we could just buy it in our own name.

The only issue is the exit strategy. If one of us wanted to sell, there would be an issue. I was told about off market transfers. If we had 1000 shares in "Y" owned by the partnership, and one of us wanted to sell, we could do an off-market transfer of 500 to each of us.

Is this a suitable solution, and does the partnership structure protect me? Obviously a unit trust would be too costly for a student!

 

[pixel]

I am an accounting student and have been following the stock market for a few years but have finally decided to jump in.

I mentioned this to my friend and he is keen to get into the market too. He wants to do the same as I do (ie if I buy 100 shares in "Y", he will buy 100 shares in "Y". The only thing is, he doesn't know much about the market.

As I have learned during my studies and as a junior accountant, giving financial advice can get you into some serious trouble if you don't have a licence. I've been told that if it went belly up, and my friend wanted to sue me, he would have that option as technically I am giving him advice.

My boss mentioned using a partnership structure to protect me. There would be no borrowing so no liability. We would contribute the same amounts. If we disagreed on a company, we could just buy it in our own name.

The only issue is the exit strategy. If one of us wanted to sell, there would be an issue. I was told about off market transfers. If we had 1000 shares in "Y" owned by the partnership, and one of us wanted to sell, we could do an off-market transfer of 500 to each of us.

Is this a suitable solution, and does the partnership structure protect me? Obviously a unit trust would be too costly for a student!

Why don't you simply draw up a private contract between the two of you?
If it's really the way you say, that your friend wants to mimic each of your trades, then let him state that and absolve you from any responsibility for his actions.

I'm sure you can bounce the idea off him and get him to agree - or not, as the case may be. If the latter, then just don't tell him what you're doing. As a student, you probably know a few Law students, off whom to bounce the idea.

If in doubt, have the contract/ disclaimer drawn up and notarised by a Legal Eagle.

 

[hotchy]

Why don't you simply draw up a private contract between the two of you?
If it's really the way you say, that your friend wants to mimic each of your trades, then let him state that and absolve you from any responsibility for his actions.

I'm sure you can bounce the idea off him and get him to agree - or not, as the case may be.

My dad actually said the same thing. I'm sure my friend wouldn't have any issues signing something like that.

 

[McLovin]

Why don't you simply draw up a private contract between the two of you?
If it's really the way you say, that your friend wants to mimic each of your trades, then let him state that and absolve you from any responsibility for his actions.

I'm sure you can bounce the idea off him and get him to agree - or not, as the case may be. If the latter, then just don't tell him what you're doing. As a student, you probably know a few Law students, off whom to bounce the idea.

If in doubt, have the contract/ disclaimer drawn up and notarised by a Legal Eagle.

Generally speaking you can't contract out legislation. So, for example, you can't create a contract that includes a clause that seeks to avoid current laws.

Why not just get him to set up his own account and when you buy he buys. Unless you are planning on frequent trading, I can't see it being a problem.

 

[fawnroux]

Wait a minute.

You're thinking of drawing up a partnership agreement, or separate contract so you can buy shares with a friend, who doesn't know much about the market, and you want to protect yourself in case he sues you later on for giving bad financial advice? Have I got this right?

To be honest, your post sounds like a question that would come up in a university exam for first year law subject.

If for some reason this is a serious question, then why don't you just un-complicate this entire scenario and NOT give financial advice? Buy the shares for yourself and tell your friend that he should do his own research and seek the opinion of a qualified professional. Problem solved. If he doesn't know too much about the market, as a friend you should encourage him to research more.

Dave

 

[pixel]

Generally speaking you can't contract out legislation. So, for example, you can't create a contract that includes a clause that seeks to avoid current laws.

I doubt it would "seek to avoid current laws"; all it would do is clarify that the friend wants to mimic - NOT take advice.

Of course, I didn't want to go into the reasons or reasonableness of the entire proposition. It sounds like a one-eyed leading a blind. But being an accountant, hotchy would've known that much - I presume. Therefore, I won't want to get any deeper into it and spend hours giving advice. That, in a nutshell, would be "Don't!"

 

[Sdajii]

I'd be surprised if you don't end up regretting it down the track. Mixing money and friends rarely ends well, and this idea triggers several alarm bells and red flags.

I am no legal expert, but I don't see how he could sue you if he simply copied you without you charging for it. If you said "I recommend nothing to you, but today I bought 100 XYZ shares for $x.xxx" what he does with that information is up to him. If that's not the legal case, it means none of us should be allowed to ever discuss our investments. Several people have copied my moves (sometimes when I'd rather they hadn't and I now make sure to limit what I say to certain people). I wouldn't manage his account directly as that has all sorts of inevitable problems, certainly not limited to legal.

Short answer: Danger! Danger! Run away!

 

[waimate01]

Short answer: Danger! Danger! Run away!

+1

Not doing it is a very elegant and scalable approach with no downside risk, and an equal amount of upside opportunity as doing it would provide.

 

[hotchy]

To clarify - I'm not doing anything for him. We have our seperate accounts, we would just be doing the same trades.

 

[McLovin]

I doubt it would "seek to avoid current laws"; all it would do is clarify that the friend wants to mimic - NOT take advice.

How is that not taking advice? The act of person A buying the shares induces person B to do the same.

It would seem to be providing a "recommendation" under the Corps Act...

CORPORATIONS ACT 2001 - SECT 766B

Meaning of financial product advice
(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

I am no legal expert, but I don't see how he could sue you if he simply copied you without you charging for it. If you said "I recommend nothing to you, but today I bought 100 XYZ shares for $x.xxx" what he does with that information is up to him. If that's not the legal case, it means none of us should be allowed to ever discuss our investments. Several people have copied my moves (sometimes when I'd rather they hadn't and I now make sure to limit what I say to certain people). I wouldn't manage his account directly as that has all sorts of inevitable problems, certainly not limited to legal.

I think there's a difference between telling your friends what you have bought and having a formalised system in place of "you buy what I buy".

 

[pixel]

(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:

(a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or

(b) could reasonably be regarded as being intended to have such an influence.

I fail to see how my statement "I bought 10,000 TOL at $4.25" can be construed as intended to influence. Especially so, if I keep reporting truthfully and completely every trade I make.
Things MIGHT be viewed differently if I reported selectively, waited with the release of some statements until I had bought enough, then told others about it in order to sell into their subsequent buying. Anecdotal evidence suggests that some publishers of stock tips may have been tempted once or twice ...

 

[McLovin]

I fail to see how my statement "I bought 10,000 TOL at $4.25" can be construed as intended to influence. Especially so, if I keep reporting truthfully and completely every trade I make.

The OP makes it very clear that the intention is for his friend to replicate his trades. I don't know how you can argue that under that scenario it is not intended to influence his friend's investment decisions. The fact that his friend "doesn't know much about the market" further strengthens the case that he is relying on the OP to provide advice. This is entirely different to telling someone "I bought XYZ, yesterday" in general conversation and them deciding to buy on the strength of that information.

This does feel a lot like a first year law exam question.

Next week, promissory estoppel.

Oh, I just noticed, the OP will be doing it for free, and if there's one thing you learn in first year law it's no consideration = no contract!

 

[Ves]

Oh, I just noticed, the OP will be doing it for free, and if there's one thing you learn in first year law it's no consideration = no contract!

I think this fact is the most important in this discussion - as far as I know, since the person A (the knowledgable one) has no affiliation with a financial services provider and is certainly not charging person B (the recipient of the information), then there is no basis for this to be classified as a "financial product" or "financial advice."

I am not a legal expert - and the law certainly has its grey areas - so please do not take my post as gospel.

 

[McLovin]

I think this fact is the most important in this discussion - as far as I know, since the person A (the knowledgable one) has no affiliation with a financial services provider and is certainly not charging person B (the recipient of the information), then there is no basis for this to be classified as a "financial product" or "financial advice."

I am not a legal expert - and the law certainly has its grey areas - so please do not take my post as gospel.

Advice is advice, the Corps Act makes no requirement that it be paid advice. I was just saying that no contract can be formed, as had been suggested earlier in this thread.

 

[Ves]

Advice is advice, the Corps Act makes no requirement that it be paid advice. I was just saying that no contract can be formed, as had been suggested earlier in this thread.

So what about the countless forum posts on this and other forums that say "I bought today at this price" or even more so "the model portfolio" threads that SKC and Robusta to name a few ran? Is that not the same? You are posting the information publicly, and it would be hard to argue that you did not foresee that your actions could not have a direct influence on others?

 

[McLovin]

So what about the countless forum posts on this and other forums that say "I bought today at this price" or even more so "the model portfolio" threads that SKC and Robusta to name a few ran? Is that not the same? You are posting the information publicly, and it would be hard to argue that you did not foresee that your actions could not have a direct influence on others?

According to ASIC's interpretation of the law, internet discussion sites are but have been given an exemption.

Our policy
RG 162.6 Under the Law, a person who conducts an investment advice business must have a licence. What amounts to such a business is widely defined, and catches IDS that allow people to exchange or disseminate information, opinions and advice about securities. On a strict reading of the Law, therefore, IDS may need to operate under a licence.
RG 162.7 However, we will permit a limited type of IDS to operate without a licence if the operator complies with our guidelines. These guidelines require that:
(a) the IDS is operated to enable people who are not securities market professionals to exchange information that may include opinions and advice about securities;
(b) postings on the IDS are clearly identified and kept separate from commercial material on the site; and
(c) people who use the IDS receive adequate disclosures and warnings including that the material posted on the IDS is not professional investment advice.

http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ps162.pdf/$file/ps162.pdf

If they consider posts on an anonymous IBB "advice" then I can't see how in their right mind they wouldn't consider what the OP proposes to do as advice.

 

[Ves]

According to ASIC's interpretation of the law, internet discussion sites are but have been given an exemption.



http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/ps162.pdf/$file/ps162.pdf

If they consider posts on an anonymous IBB "advice" then I can't see how in their right mind they wouldn't consider what the OP proposes to do as advice.

Thanks mate - perhaps I must confess I do not understand the law as much as I previously thought that I did.

 

[hotchy]

I guess the easiest option would just to go it alone.

We thought it would be fun and a learning experience more than anything.

It's hard to believe that friends can't discuss this topic without getting in hot water.

We would be making the decisions together anyway, as we have already discussed numerous stocks thrown a lot of them out of the watch lists and added new ones. It's not just me saying "I'm buying this one, are you gonna do the same?"

 

[McLovin]

I guess the easiest option would just to go it alone.

We thought it would be fun and a learning experience more than anything.

It's hard to believe that friends can't discuss this topic without getting in hot water.

We would be making the decisions together anyway, as we have already discussed numerous stocks thrown a lot of them out of the watch lists and added new ones. It's not just me saying "I'm buying this one, are you gonna do the same?"

Well you've changed your tune so it sounds like you're trying to get the answer you want to hear. I'm sure there are thousands of people doing what you propose, I'd just be worried about what might happen if it all blows up.

 

[Klogg]

I guess the easiest option would just to go it alone.

We thought it would be fun and a learning experience more than anything.

It's hard to believe that friends can't discuss this topic without getting in hot water.

We would be making the decisions together anyway, as we have already discussed numerous stocks thrown a lot of them out of the watch lists and added new ones. It's not just me saying "I'm buying this one, are you gonna do the same?"

My friend and I started discussing companies in detail when we first began, bouncing ideas off of each other. It's amazing how useful it is (especially because hes got a finance background). As a result, our holdings are very, very similar.

It's a great idea - even if it's not a joint ownership.