A few days ago, I attended a sold-out event hosted by CFA Society of San Francisco – How to start a Registered Investment Advisory firm (RIA). Five RIA managers came to downtown San Francisco to share their thoughts and experience starting their own firms. Each of them has been managing their practice for 2 to 6 years. The moderator and event organizer Randy Young did a great job getting these panels together, and for those who missed this informational session, here are my notes.
In Part I here, I will cover the following topics:
In Part II, I will cover the following:
In Part III, I will cover the following:
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The reasons to start their firms vary: could not find an existing firm with the same investment management strategies; fell into the entrepreneurship through word-of-mouth; previous mutual fund withdrew from west coast and wanted to start something with higher concentration; no reliable and ethical advisory firms to refer family and friends to.
What they enjoy most is very similar: do things the way they want without other’s approval/ability to run the firm the way it should be run; pride in protecting their clients’ assets to weather through the financial crisis; having grateful and trusting clients. The only female panel also pointed out the flexible hours which allow her to have more family time with her two children.
<one additional benefit discussed in my previous blog article: starting your own firm is like a P90X workout, you get to expose to different aspects of running a business v.s. the daily routine of being an employee.>
All panels said yes to both questions. Two important items in the business plan were discussed:
1. Have a realistic cash flow forecast.
Always be conservative with the revenue, aggressive with the costs. Most managers warned that there will be an ugly 2-3 years ahead, but also pointed out the great potential in the future.
2. Define target clients and how to serve them.
This helps you decide which clients to accept as the practice grows and keeps you on the right track. In the case that you are partnering with other people, it also ensures the team is on the same page and delivers consistent services to the investors.
The biggest expenditure is the office rent, which can cost between $30k to $50k a year; add stock research software (varies depending on which vendor you use), E&O insurance (~$3k annun), office supply, and optional marketing (will discuss more below). During inception of the firm, you will also have some legal costs which can cost between $4k and $15k. All panels outsource the compliance work to consultants rather than doing it themselves. All together, give yourself $40k-$60k expense budget every year, on top of that, you will also need to add your own compensation, then you will have your target revenue.
<My comment: outsource compliance doesn’t mean outsource liabilities. Always make sure to review all documents before they go out to regulatory bodies and investors.>
All panels mentioned the power of “word-of-mouth”. Reaching out to existing network, maybe 5-15 eligible individuals (CPAs, doctors and attorneys seem to be good resources), and let them know what you are working on and whom you are looking for. Focus on your strengths/niche when you deliver the pitch. If you are reaching out to clients of your ex-employer, wait until you officially resign from the firm, otherwise such unethical conducts may stay on your ADV for the next 10 years, and you may lose your CFA license in addition to legal charges.
Only two panels made some serious marketing efforts other than word-of-mouth. One speaks Chinese and attends Chinese radio talk show discussing investments regularly, and gets 5-6 calls after the show consistently. Another one uses salesforce.com for customer relationship management.
(cotinue to Part II)
