Advice on setting up a RIA/CTA firm

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luke41

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I’m seeking constructive advice/criticism pertaining to my idea of starting my own Registered Investment Advisory/Commodity Trading Advisory firm. I’m in Ohio and from a small rural farming community and have recently passed level 3. Have 5 years of commission driven financial advisor experience with 4 different firms, with no sustained level of success. When I decided to get the CFA charter I had envisioned it would help me gain a junior analyst position and I could then move to a PM position at a regional bank, local ria firm, small mutual fund company, etc. I’ve come to the conclusion that this opportunity will never be available for me, so my only option to make a living an industry that I have a great passion for yet at the same time despise due to the many inequities in how advise is given to retail customers, I’ll need to set up my own practice. My 50,000 feet view from the sky is provide fee based fiduciary driven investment practice where I would help clients determine their proper strategic asset allocation along with proper tactical asset allocation and risk management strategies based on building a personal investment policy statement for each client. Also, I would seek to help farmers in hedging their price and cash flow risk by showing them how they can hedge their crop sales with options and futures (plan to primarily just use options). I figure that to set this up on my own will cost at least $4000, which I currently don’t have as I’ve been out of work since June 1. Also, I’ll obviously not have any revenue day one, and probably won’t have any for the first 6 months. And at that time, it won’t be enough to sustain my current expenses. My plan is to substitute teach at the local school district as I build my business, so I can eat and keep a roof over my head. I’m struggling to determine how much in basis points to charge and how I should modify this charge for aum, services provided (farming out management by selecting mutual funds vs. selecting etfs and individual securities), setting realistic expectations for growth, and whether my idea is even feasible and realistic at all. I’ve spoken to a couple of RIA service firms and I know that they’d provide a lot of assistance in these questions, but they aren’t going to tell me any cold hard truths as they don’t get paid unless I do go forward and set up the firm.Any thoughs are much appreciated.
 
Without a book of business to start with, opening an RIA is going to be extremely difficult. You could be the best investment manager on earth, but you need a plan to gather assets. Good news is you don’t need to register with the SEC until you hit $25mm so you can easily start up an RIA and see how it goes.
Most RIAs charge anywhere from 60-150 bps, and you can charge varying levels of fees based on the client’s assets (i.e. breakpoints).
You’ll have to pick a custodian - Schwab, TDW, or Fidelity are the likely candidates.
None of this matters though if you don’t bring in assets. Figure that part out before you move forward. You’ll need to get to around $60mm before you can take a breath. Good luck.
 
I talk to RIA’s all day long and sell them products to help them effectively run their businesses. Sweep the Leg provides some great input here. Schwab and TD are by far the most popular custodians that I come across. With their assistance, you’ll get access to their Portfolio Center and Veo platforms, respectively. These platforms help you manage your client assets.
From my experiences, I’ve never seen anyone get rejected from TD when seeking approval. Like anything, the business is completely referral based. Do you have a lot of professional contacts in your area?
 
Sweep the Leg Wrote:
——————————————————-
> Good news is
> you don’t need to register with the SEC until you
> hit $25mm so you can easily start up an RIA and
> see how it goes.
30mm and he needs to register with the state before.
 
If you haven’t been able to build a book of business in the last 5 years (with 4 companies!) how are you going to build one now? Why didn’t you have success? What makes you think you’ll be successful now?
 
do both. Substitute teach to have an income and save for the upfront fees of the RIA. Build the business slowly and the right way. with an RIA you don’t have to gather a certain $ amount of assets within a set time frame. Run it the way you want.
 
I second everyone else. I work at an RIA w/ over $1.1 billion.
It’s extremely competivitive- everything you’re thinking about offering is already offered by other people w/ more experiance than you, ppl w/ offices, E&O insurance, they offer performance reporting, financial planning & etc. You’re going to need a legitimate website too. To be honest, don’t expect to take home a paycheck for 5 years.
Schwab will want $10 million up front to get on the Schwab Institutional Platform. I think TD Ameritrade is starting to ask for the same. You may have to custody your assets at E trade.
That being said; if you think there’s a market for what you offer and you’re willing to work your @ss off- then go for it. It’s not something that grants overnight success though.
 
ASSet_MANagement Wrote:
——————————————————-
> Sweep the Leg Wrote:
> ————————————————–
> —–
> > Good news is
> > you don’t need to register with the SEC until
> you
> > hit $25mm so you can easily start up an RIA and
> > see how it goes.
>
> 30mm and he needs to register with the state
> before.
Under the new Frank-Dodd Financial Reform Act state registrations are all the way up to 100mm.
 
Thanks for all of the input. I was thinking of Interactive Brokers, because as far as I know, they’re the cheapest as far as commissions and they don’t have any minimums. I’ve heard as a few of you have mentioned, that Schwab, TD, and Fidelity have the best platforms, but I’m guessing that I’d have to pay up for their services until I get to a certain aum level. Never the less, something I obviously need to verify.
Fedge, obviously a legitimate concern that you brought up with my lack of success even though I’ve been with 4 different firms. What might make it different this time? The firms I was with were in the business of driving up front commissions, not gathering assets and managing relationships and accounts. That meant a business of mostly front load mutual funds and variable/fixed annuities. Also meant that I needed to hard sell people into these products when I often felt that it wasn’t in their best interest, and I obviously couldn’t convince myself that it was in clients best interest which eventually led to my demise at these firms. The RIA route I could build the business as I see best fit for my clients and at my own pace.
Systematic - the upfront and continued fixed expenses you mention are probably what scares me the most. However, if I can develop it how I have envisioned, I’d be offering a bit of a different service as I’d be the only one in my geographical area that is liable as a fiduciary, not just suitability standards, and would help clients in devoloping investment policy statements. I know this would be unique as the firms that dominate the geographical area I know aren’t doing this because those are the type of firms I’ve worked for (EJ, regional banks, ins. companies, etc.). Proving this as a worthy service and making it scalable for less sophisticated clients with smaller investments may make this an exercise in futility.
As far as income, keep in mind I’m in the rural midwest and can get back with a lot less than in the traditional urban money centers. With 10m aum and charging 75bps I could live very comfortably and still be able to put a lot back into the business for marketing and technology investments.
Any more thoughts and reccomendations are very much appreciated.
 
mwvt9 Wrote:
——————————————————-
> ASSet_MANagement Wrote:
> ————————————————–
> —–
> > Sweep the Leg Wrote:
> >
> ————————————————–
>
> > —–
> > > Good news is
> > > you don’t need to register with the SEC until
> > you
> > > hit $25mm so you can easily start up an RIA
> and
> > > see how it goes.
> >
> > 30mm and he needs to register with the state
> > before.
>
> Under the new Frank-Dodd Financial Reform Act
> state registrations are all the way up to 100mm.
How about that, it is at the state level up to $100mm now. Thank god. I’m sure that piece of legislation will prevent another financial crisis. Before the bill it was $25 though, so I wouldn’t chalk this up to one of the very few times in my life I’ve been wrong.
http://www.marketwire.com/press-release/Thousands-RIAs-Need-Prepare-Shif...
 
Ah fugnuts….we’re an RIA at 85M AUM. I can’t believe they’re goign to make us go back to registerign with the state.
 
Ah fugnuts….we’re an RIA at 85M AUM. I can’t believe they’re goign to make us go back to registerign with the state.
 
Hopefully they delay implementation until end of next year to allow states to prepare, by then we should be over the $100M mark (assuming our performance and new account growth mirrors the last few years).
As far as the original question it can be done starting with $0 AUM, but you’ll have to control costs like a hawk and it is a tough slog the first several years. However, given that you don’t even have $4,000 saved up I’d advise agaist this route.
 
Sponge_Bob_CFA Wrote:
——————————————————-
> Hopefully they delay implementation until end of
> next year to allow states to prepare, by then we
> should be over the $100M mark (assuming our
> performance and new account growth mirrors the
> last few years).
I think it is sometime in 2011.
>
> As far as the original question it can be done
> starting with $0 AUM, but you’ll have to control
> costs like a hawk and it is a tough slog the first
> several years. However, given that you don’t even
> have $4,000 saved up I’d advise agaist this route.
I went this route and it sucked.
 
I rode the coat tails, but my business partner started the firm with $0 AUM. You have to be prepared to make some serious personal sacrifices, as it will take a few years to break even. The one piece of advice I could give would be that you can run a business quite effectively without all sorts of software, marketing, etc. These seemingly small expenses ad up. Having been involved with a few start ups, I’d say most firms fail not because of revenue, but because of inability to control expenses.
Unless you’ve got lots of FFF (Friends, Family, and Fools) I’d attach yourself to an established namebrand. From what you said, you do not have a long enough track record to attract much business initial….once things get going it is mostly referral, but you’ll have a tough go getting that first $5-10M.
 
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