How to Legally Invest Other People’s Money: Licensing and Fiduciary Duty

To legally invest other people’s money in the United States, you generally need to do one of three things: register as an investment adviser with your state or the SEC, qualify for a specific statutory exemption, or act under a legal arrangement like a financial power of attorney. Which path applies depends on who you’re advising, how you get paid, and how much money you handle. Getting it wrong carries fines up to $10,000 and up to five years in federal prison for willful violations,¹ so the first question to settle is whether the law considers you an investment adviser at all.

When the Law Treats You as an Investment Adviser

The Investment Advisers Act of 1940 applies a three-part test. You’re an investment adviser if you (1) advise others about securities, (2) do so as part of a business, and (3) receive compensation for it.² All three have to be present. Drop any one and the definition doesn’t apply.

Each element reads broadly. “Business” doesn’t require the activity to be your full-time job or even your main one. Holding yourself out as a financial planner, managing assets with any regularity, or marketing advisory services is enough. “Compensation” isn’t limited to a flat fee. A percentage of assets under management, commissions, referral payments, or any other economic benefit tied to the advice counts, including advice bundled into a broader service when the advisory piece is meaningful. “Securities” covers stocks, bonds, mutual funds, ETFs, options, and limited partnership interests.

If you’re taking a cut to tell someone where to put their money, you’re almost certainly inside the definition.

Who Is Excluded

The statute carves out several professions whose investment-related advice is treated as incidental to their main work. Lawyers, accountants, engineers, and teachers are excluded on that basis.² An accountant who suggests a portfolio rebalance during tax planning is fine; an accountant who runs a separate portfolio management service is not.

Broker-dealers are excluded when their advice is incidental to executing trades and they take no special compensation for the advisory piece. Publishers of newspapers and financial publications of general circulation are excluded too. Family offices managing wealth for a single family are excluded by rule.

These carve-outs are narrow. The moment advice stops being incidental and starts looking like a standalone service, the exclusion disappears. Regulators look at how you market yourself, where your revenue comes from, and whether clients reasonably view you as their adviser.

Where You Register: State or SEC

Once you meet the definition, you have to register. The dividing line between state and federal registration is assets under management.

Under $25 million AUM: register with your home state’s securities regulator. SEC registration is prohibited in nearly every state.
$25 million to $100 million AUM: generally state registration, except that advisers based in New York or Wyoming register with the SEC.
$100 million to $110 million AUM: a buffer zone. SEC registration is permitted at $100 million and required at $110 million.
$110 million and above: SEC registration is mandatory.

Once you’re registered with the SEC, you don’t drop back to state registration unless AUM falls below $90 million.³

Registration at either level runs through Form ADV, the central disclosure document for advisers. Part 1 covers your business, ownership, disciplinary history, and clients. Part 2 is a narrative brochure describing your services, fees, strategies, and conflicts of interest, which clients actually receive.⁴ Form ADV must be updated annually and amended promptly when material information changes.

Exemptions That Reduce the Requirements

Not everyone who meets the adviser definition goes through full registration. The Act provides several exemptions, though even exempt advisers face reporting obligations and remain subject to the antifraud rules.

The private fund adviser exemption covers advisers who work exclusively with private funds and manage less than $150 million in U.S. assets.⁵ It’s the route many early-stage hedge fund and private equity managers use. Exempt reporting advisers still file a scaled-down Form ADV within 60 days of relying on the exemption.⁴

The intrastate exemption applies when every client lives in the state where your principal office sits and you don’t advise on securities listed on a national exchange. It disappears the moment you advise any private fund.⁵

A de minimis provision prevents states from requiring registration if you have no office there and had fewer than six clients in that state during the preceding 12 months.⁶ It’s a rolling window, so terminated clients still count.

Every exemption works on strict conditions. If your circumstances change and you no longer qualify, you have to register or stop advising. There’s no quiet grace period.

The Series 65 Exam

Registration is the firm-level requirement. At the individual level, the people actually giving advice typically have to pass the Series 65, formally the NASAA Uniform Investment Adviser Law Examination. It runs 130 scored questions over three hours, costs $187, and requires at least 92 correct answers to pass.⁷

Most states waive the Series 65 for holders of certain professional designations: the CFP, CFA, ChFC, or PFS.⁸ The waiver isn’t automatic. Each state decides which designations it accepts and may add background checks and fees. Check with your state securities administrator before relying on a designation alone.

In states that have adopted NASAA’s continuing education model rule, registered representatives also have ongoing education obligations to keep their licenses active.

What Fiduciary Duty Requires

Every investment adviser owes fiduciary duties to clients, whether fully registered or operating under an exemption. The SEC’s 2019 interpretation splits the duty into care and loyalty.⁹

The duty of care means advice must genuinely serve the client’s best interest given their situation, goals, and risk tolerance. It also requires seeking best execution reasonably available on trades and monitoring the portfolio across the relationship. Set-and-forget isn’t acceptable.

The duty of loyalty means you don’t put your financial interest ahead of the client’s. Conflicts must be eliminated or fully disclosed with the client’s informed consent. The SEC has said disclosure has to be specific enough for the client to actually understand the conflict. Vague boilerplate in the fine print doesn’t satisfy the rule.

Handling Client Money and Records

If you have custody of client assets, meaning you hold their funds or securities or can withdraw them, federal rules require those assets to sit with a qualified custodian: an FDIC-insured bank, a registered broker-dealer, or a registered futures commission merchant.¹⁰ Depositing client money into your own account isn’t an option.

The custodian holds the assets in accounts under each client’s name, or in accounts holding only client funds under the adviser’s name as agent or trustee. Commingling client assets with your own is treated as fraud under the Act. Clients must also receive account statements directly from the custodian so they can independently verify where the money is.

Registered advisers also keep detailed books for at least five years: cash journals, memoranda of every trade order, written communications with clients about recommendations or transactions, and documentation supporting any performance figures used in marketing.¹¹ This is what regulators look at during inspections, and gaps turn into problems quickly.

Conduct That’s Flatly Off-Limits

The Act prohibits any scheme to defraud a client, any practice that operates as fraud or deceit, and any trade with a client’s account for the adviser’s own benefit without written disclosure and consent.¹²

That last point trips up more advisers than you’d expect. If you want to sell a security from your personal portfolio into a client’s account, or buy one out of a client’s account into your own, you need written disclosure that you’re on the other side of the trade and the client’s consent before it closes. Every single time, not just the first.

What Noncompliance Costs

Willful violations of the Investment Advisers Act carry fines up to $10,000, imprisonment up to five years, or both.¹ “Willfully” doesn’t require intent to break the law. Courts have generally read it to mean you intended the act that turned out to be illegal, even without knowing it was.

On the civil side, the SEC can seek injunctions shutting down the advisory business, disgorgement of fees and profits, and civil monetary penalties on top. The agency routinely brings cases against unregistered advisers and those who defraud clients.¹³ State regulators can bring parallel actions, revoke registration, impose fines, and refer cases for criminal prosecution under state law. Operating without registration when you should be registered is itself a violation, independent of whether anyone was defrauded.

Managing Investments Under a Power of Attorney

A separate legal path applies when you manage investments for someone who has authorized you through a financial power of attorney. A POA is a document in which a principal authorizes an agent to handle financial matters, which can include buying and selling securities and managing brokerage accounts.¹⁴

This isn’t the same as being an investment adviser. You aren’t advising for compensation as a business; you’re stepping into the principal’s shoes to execute decisions on their behalf. It’s the usual arrangement when an aging parent needs help or someone becomes incapacitated.

The agent still owes fiduciary duties. You act in good faith, stay inside the authority the document grants, keep the principal’s property fully separate from your own, and keep records of every transaction. Using POA authority to benefit yourself at the principal’s expense exposes you to civil liability and potentially criminal charges for financial exploitation.

Investment Clubs and Informal Arrangements

Investment clubs, where a group pools money and makes joint decisions, generally don’t need to register with the SEC or register their membership interests.¹⁵ The structure works because members are collectively making decisions about their own pooled money, not paying one person to advise them.

That structure breaks the moment one person calls all the shots or the club starts accepting money from passive investors who don’t participate in decisions. At that point you’re potentially running an unregistered investment company or acting as an unregistered adviser. Managing a pool of other people’s money where the investors are passive means forming a private fund under one of the exemptions above, with the reporting that comes with it.

The informal “I’ll invest your money for you” deal between friends or family, with no POA and no registration, is the setup most likely to create legal exposure. Everyone trusting each other doesn’t change the law. The moment you take a cut of profits or charge a management fee, you’re giving investment advice as a compensated business, and the Act applies.

1
Office of the Law Revision Counsel. 15 USC 80b-17 – Penalties
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Office of the Law Revision Counsel. 15 USC 80b-2 – Definitions
3
SEC. Transition of Mid-Sized Investment Advisers from Federal to State Registration
4
SEC.gov. Form ADV – General Instructions
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Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers
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Federal Register. Exemption for Certain Investment Advisers Operating Through the Internet
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FINRA.org. Series 65 – Uniform Investment Adviser Law Exam
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NASAA. Exam FAQs
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U.S. Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
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eCFR. 17 CFR 275.206(4)-2 – Custody of Funds or Securities of Clients by Investment Advisers
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SEC.gov. Books and Records to Be Maintained by Investment Advisers
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Office of the Law Revision Counsel. 15 USC 80b-6 – Prohibited Transactions by Investment Advisers
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U.S. Securities and Exchange Commission. Three Investment Adviser Representatives Settle SEC Charges
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Consumer Financial Protection Bureau. What Is a Power of Attorney (POA)?
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U.S. Securities and Exchange Commission. Investment Clubs