Is This A Crazy Business Idea?

[stuper1]

I've been thinking of starting an online business to provide investing advice to young people who want to get started investing in 401k's, IRA's, etc., but need some help.  I read an article yesterday based on a survey that reported that what these young people really want is a one-on-one advisor.  Looking back 20 years or so, I know that I certainly could have benefited from some good advice from someone with more experience.

I'm thinking that the website would provide enough info by itself for a lot of people to decide on their investing strategy, but then for those that want something more I would also offer a one-on-one service, say on the phone or over Skype, for a fairly low fee, something like $50 per hour (to start, maybe more later if it takes off), which I would think is far less than what most investing professionals would charge.  I would also hopefully make money from advertising and affiliate marketing on the website.  Prior to a one-on-one session they would fill out a questionnaire on their investment objectives and risk-tolerance, and send me the questionnaire along with say the list of available investments for their 401k with expense ratios, etc.  In the one-on-one session I would provide them with two or three possible allocation and rebalancing strategies that they could pick from, and discuss the pros and cons of each.

So, is this a crazy idea, or something worth pursuing?  Am I likely to run afoul of any laws regarding investment advisors?  I live in California.  I tried looking up the laws about investment advisors here, but it wasn't clear to me whether this proposed business would violate the law or not.  Aside from that issue, are there other potential risks or liabilities that I haven't thought of?

[Cortopassi]

Is it a crazy idea?  No.

After running a few small businesses, the only question I have for you nowadays is how do you get yourself picked out of the noise of thousands (millions?) of investment related firms, people and websites out there?

We always had decent product ideas.  How to market those ideas effectively and even get people to know you exist seems to be the biggest challenge.

If you have an answer to this, let me know.  It has always been my failing.  A simple Google search for "one on one financial planning" seems to show many larger organizations provide that as a service to employees, as do banks and financial firms.  It seems you'd want to be targeting more those starting out which at least limits your scope, but the question still is how do you reach them?

[stuper1]

Yes, I agree with you 100% that reaching the target audience will be the hardest thing.

I think there are two types of one-on-one advice that are currently being offered.  The first is fairly expensive (especially from a young person's perspective) from someone like a certified financial planner.  The second may be offered free by a company through its 401k provider, but its very generic, narrow-minded and biased (only wants to sell its own products -- stock and bond funds), and worth about what was paid for it (nothing).  My goal would be to provide something in the middle, which is not very costly, but provides some some broad-minded, fairly specific, actionable advice.

Here is the definition of an investment adviser in California code:  An investment adviser (“IA”) is defined in Corporations Code (“Code”) Section 25009 as any person who, for Compensation, engages in the Business of Advising others, either directly or indirectly through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, publishes analyses or reports concerning securities.

Does the business I'm describing fit that definition if I'm recommending to someone that, based on how they've answered my questionnaire and based on the available funds in their 401k, I would recommend that they put X% of their money into Y stock fund and Z% of their money into Q bond fund and rebalance annually?

[Cortopassi]

I would say unless you never write a single email to any of your clients, ever, then you aren't technically an investment advisor.  It seems to revolve around publications and writings.

I would think one of the ways to get yourself out there is to start a blog.  Seems you'd need to become a registered investment advisor if you take it from an investment blog with disclaimers to actually advising people.

Would also seem that there is ample opportunity for you or your LLC/corp to get sued by anyone not happy with your services.  It is one thing to have a $19.99 product returned because someone doesn't like it, quite another to get sued by someone who lost a lot of money because they followed your advice!

[iwealth]

I'd say it's pretty clear that what you want to do classifies as investment advising in California and that you'd have to be registered with the state to do so.

But please call the appropriate sources to get an official answer before you do anything.

[l82start]

i wonder if you could tweek it a bit to be "financial management", and avoid "investment advise", and all the related laws. if you are targeting the young and starting out, just giving basic information about debt avoidance, asset allocation, diversification, types of accounts,  and their pros and cons etc.. without actually guiding the final choices, might be as or more beneficial to the client.
the question is would you still be under investment advisor rules?

[Tyler]

I think it's a good idea.  The biggest issues I see are competition, credibility, and legal barriers.

There are absolutely legal issues with providing personal investment advice (especially when turning it into a business), and it's important to fully understand them before biting off more than you can chew.  The recent new federal fiduciary regulations for anyone giving advice on retirement accounts only complicates it more.  It's absolutely manageable and lots of people do it, but be smart about it. 

FWIW, I very intentionally avoid giving any personal advice on my site or even when people email me directly for this very reason.  As much as I'd like to help (paid or not), it's not worth the risk of getting sued over it if your legal house is not completely in order.  I've also tossed around a similar idea, but have yet to put in the effort to fully research everything required.  (BTW, thanks for the link, Desert.  That's an interesting service.)

Assuming you properly account for that, the next step is figuring out how to differentiate yourself from other options (both human and robot these days). This involves not only getting your name out there, but also establishing credibility.  What makes you the best choice?  Giving good advice to young investors isn't that difficult.  Finding someone who wants to pay for your advice requires a lot more work. 

[Benko]

Doesn't getting paid only for your financial advice (and not taking commissions on investments) differentiate you from >90% of services out there?

[Tyler]

Doesn't getting paid only for your financial advice (and not taking commissions on investments) differentiate you from >90% of services out there?

I don't know the exact percentage, but fee-only advisers are already a thing and definitely provide a valuable service.

http://www.napfa.org/index.asp

From the FAQ:

What Is A Fee-Only Planner?
NAPFA defines a Fee-Only planner as one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. A NAPFA member or affiliate may not receive commissions, rebates, finder’s fees, bonuses or any form of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.

[MachineGhost]

they would fill out a questionnaire on their investment objectives and risk-tolerance, and send me the questionnaire

That is where the financial industry completely fails people.  Those stupid questionnaires are completely divorced from real-world reality.  People don't know what their risk tolerance is and people don't always have investment objectives.  If you can hack the approach to be in English and in every day experience, you will have a competitive advantage.

So, is this a crazy idea, or something worth pursuing?  Am I likely to run afoul of any laws regarding investment advisors?  I live in California.  I tried looking up the laws about investment advisors here, but it wasn't clear to me whether this proposed business would violate the law or not.  Aside from that issue, are there other potential risks or liabilities that I haven't thought of?

It's not illegal to provide free speeh advice, but fully expect a judicial battle at anytime with the regulatory agencies if you want to be proven in the right (after some competitor rats on you).  Being a licensed "broker" or an "investment advisor" has everything to do with selling stuff or managing money, not giving out advice.  On the other hand, what are your illustrous credentials to be giving out free speech advice?  How are you going to overcome that negative perception?  So at least acquire one of the official designations such as ChFC, CFP or CLU.

[MachineGhost]

Yes, I agree with you 100% that reaching the target audience will be the hardest thing.

You need to do it via an app to reach Millennials.

Does the business I'm describing fit that definition if I'm recommending to someone that, based on how they've answered my questionnaire and based on the available funds in their 401k, I would recommend that they put X% of their money into Y stock fund and Z% of their money into Q bond fund and rebalance annually?

BTW, as a business, you don't have free speech rights.  If you were to offer this service as an individual, then you would.

[MachineGhost]

What Is A Fee-Only Planner?
NAPFA defines a Fee-Only planner as one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. A NAPFA member or affiliate may not receive commissions, rebates, finder’s fees, bonuses or any form of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.

You have to be careful with this.  You can still be a fee-only broker with a suitability duty standard and not a fee-only investment advisor with a fiduciary duty standard.  If an "advisor" is associated with a brokerage firm, then you can safely assume they are in the former category and won't have your best interests at heart.  They will be pushing their company's products.  That may not be bad for the client in the case of something like Schwab or Vanguard with their low cost funds, but they're but a pipsqueak to the firms that actively prey in this rea.