(Continued from Part I)
In Part I, I covered the following topics:
- Why did you start the firm and what do you enjoy most?
- Did you have a business plan? Was it necessary?
- Costs starting and running the practice
- How did you get your first investors?
In this Part II, I will cover the following:
- License or registration requirement to start the RIA practice.
- Which one is more important to the investors? Service or performance. What are the differences between an RIA or a hedge fund
- Fee structure and average asset under management per investor
In the final Part III, I will cover the following:
- Thoughts on social media marketing
- Competition with the big shops
- License or registration requirement to start the RIA practice
You will need to check with the states your investors reside in. If all your investors are California residents and you have fewer than 6 investors, you can start providing investment advisory services without registering with anyone. You may need series 65 or 66 license, but there may be exemption if you have CFA designation.
<my comment: of course, if you are not registered, you cannot hold yourself out as registered investment advisors, and that will limit your credibility, however, you can at least start trading on your client’s behalf and worry about registration later. Regulations change rapidly especially with the new investment act effective soon, check with your local regulatory body during your launch. >
- Which one is more important to the investors? Service or performance? What are the differences between an RIA or a hedge fund (HF)?
I put these two questions together since they’re related. Performance is going to be a priority for the investors regardless of which model you go for. Even if RIA managers are providing excellent client services, including running their clients’ dogs, it won’t matter if the investment return isn’t living up to what managers claimed in the beginning.
Although all hedge funds are RIA with state or SEC, none of the RIA panels are running hedge funds. These RIA managers provide financial planning advice and place trades based on the individual financial needs, considering the messy and sometimes emotional situation their clients may have, such as divorce. These RIA managers hold their clients’ hands and focus a lot more on long-term relationship and usually become the family’s trusted advisor down the road.
Hedge funds managers focus a lot more on numbers. Investors should decide how much money they’re comfortable giving the funds after getting a good understanding of the fund’s investment strategy and the associated risks.
Although there are cases where a financial planner starts out with separate managed accounts (SMAs) and later becomes a hedge fund manager, you should think about which path you want to go down on day one. Are you a people person (RIA) or number person (HF)? You also need to understand RIA practice is a lot less scalable than HF since RIA investors need individual attention and may have their accounts set up with all different custodians, which increases operational complexity. A lot of HF turn away SMA investors unless the investors are investing over $100mm due to the difficulty in both operation and investors relationship (existing fund investors may ask why these SMA investors enjoy benefits such as better transparency, liquidity etc).
It’s going to be difficult to convert your RIA investors to HF investors unless the RIA is structured very similar to a hedge fund in the first place. If all your investors are comfortable having their assets with one custodian, being charged performance fee in addition to advisory fee, you have a better chance keeping them as your clients when you switch over to running a hedge fund.>
- Fee structure and asset under management (AUM) per investor
The panels generously shared their firms’ information: AUM varies between $300k to $50mm. Fee charge varies from 75 BP to 1% flat rate for fully bundled financial planning services.
<my comments: compare this to hedge funds which typically enjoy 220 fee structure (2% management fee and 20% performance fee), one can easily see why some managers are motivated to go to the hedge fund model if not for the ease in management.>
(continue to Part III)