I'm looking for some advice and insight into going about starting an RIA. Background is I majored in econ at a top 15 school in the US, and have prop traded but am thinking about a switch to something that, while very challenging I understand, would be more stable instead of such an eat what you kill type environment, even though I was at some shops that were more specialized (regulatory risk has me concerned, too, even though it isn't HFT-related). I'm in my mid 20s. I have been a big time market follower since the early years of college, and while 'edge' is a strong term to use, I believe I have developed a great deal of savvy about how asset classes operate such as persistence of trends-especially commodities, and also in terms of, while being very pessimistic about this 'recovery', understanding the difficulty in being a bear on equities. With commodities the main thing is it's not 'contrarian' to say, hey, oil was 100, now 60, I should buy. Contrarianism often involves staying with the trend which a lot of retail wannabe heroes refuse to do, as they want to pick bottoms, and even 'scaling in' is dangerous if initiated too soon, not to mention danger of BK with companies as opposed to the underlying commodity, whereas also USO with oil is not a great vehicle to capitalize on an 'inevitable rally from 35 to 50 at least' due to con tango and time it could take. To get back on topic to the RIA, I think I could carve a niche starting with passing the exams, getting setup with one of these RIA assistance companies/attys, and then set up shop and really specify myself as being somebody who brings very personalized, customized portfolio mgmt and guidance instead of the usual bonds/stocks paradigm depending on age, not to mention conflicts of interest with much of Wall St. I have no interest in the idea of proclaiming I can beat the SPY, (illegal anyway as a fiduciary, obviously). I just think there are people at various stages in their life financially who would benefit and find value in someone who knows the 'heartbeat' of the markets and what counts, and understands TA and its limits, of course, and uses common sense and more broad analysis. For instance, it'd be hard to ride down this market to the bear mkt lows last decade with a stubborn buy and hold mentality after seeing such a rally it has had. I am probably in a camp that says sort of like 'one should own 10% or whatever in gold', one should not totally be out of equities, especially high quality ones that are entrenched and pay dividends through thick and thin, but even with capital gain tax events taken, it's better to sell than just ride things out. Especially people approaching retirement who can't ride it out, and if it does get down again big time, central banks out of ammo practically, and anymore inflationary policy will wreak even more chaos and markets would go up not intrinsically in value but nominally, as gold soars, etc. And utilizing options to say sell a put on a way oversold more obscure commodity ETF and collect premium and if allocated the ETF, getting it probably in major low territory on historical chart, as is case with many softs and grains right now. A lot of people don't understand there is access to these kinds of less invested classes of assets, through ETFs, and I can help people hedge and diversify portfolios away from just pure stocks, bonds, and the dollar, too, all in major bull mkts for so long, what if 10 yr goes to 5% +, stocks suffer aside from commodity companies, and dollar weakens? So much for 70/30 stock/bond standard 'diversification'. Instead of taking a stab and buying a commodity ETF, selling puts offers a way to get involved and more so be bullish/neutral. A huge run up in a lesser known commodity as can happen in them very quickly, like 50% +, that allows a great margin of safety on other investments, and is thus crucial as a buffer for the portfolio. Commodities are risky but do ultimately have intrinsic value, and while I know the danger is they can keep falling, there are clever ways to get involved with more complex options strategies, too. This kind of thing I feel I could utilize. RIA-specific, though, I would have zero AUM to start. My plan would be to get word out and hopefully through closer family acquaintances get some AUM going, but otherwise make strategic upfront investments in advertising, and try to get in on any seminars or conventions locally (I'm not in a major financial city, but am in a big metro area, and I think it benefits me not being in NYC or Chicago, which already flooded with finance). My aim would be to get it all set up, and just start getting probably people with a few million net worth, to go a few 100k with me, and go discretionary ideally, but also could see more so advisory fees although other hourly fees and things like that not as intriguing to me. Obviosuly I would have to know the tax rules and be there for planning type things, like saving for whatever in special advantaged accounts, but primarily my value add I would see as being an asset allocator and in terms of positioning. I digest and analyze a ton of hard core reading material on financial markets in all sectors on hard core blogs, and other sites, and studying market data, and historical trends. I feel like what is given to offer now is one size fits all funds and not enough personalization or people giving advice who don't really understand the adversity that could be faced when these inflationary policies rear their ugly head and markets get volatile like August 24th more frequently. I think on a major time frame, past 30 years or so have been credit expansion and falling rates--unmeritedly (i.e., by fiat) and I think things get a lot rockier as inflationary policy as has been had stimulates mal investment and gluts, but then quickly flips to shortages of supply as producers go belly up, and credit jerks back to tightening, irrespective of the Fed trying to strong arm things) and thus I think the road ahead is a lot rockier. One specific concern I'd have is getting a chance to actually discretionary allocate funds, as I know so many have 401ks that aren't so discretionary even under themselves, but are in funds. Especially for the people in prime working age, who want to stay in the advantaged status but couldn't have it where I allocate let alone recommend. In other words, the ability to get access to funds reserved for retirement and beyond. I know there are plenty of older people with a lot of funds sitting around that they get discretion over how to allocate, but the working age cohort is another story. And then would I just get a custodian and they handle all the main paperwork other than my prospectus and the standard forms I'd have done up front with the RIA advisor firm? I see a path to success with this, getting to say 7 million AUM and just under 2% fees, and eventually leasing an office, but just looking for advice if people have some. Especially with the logistics and costs to expect. I know certain investments would be worth it, no doubt, like a good website. The main thing would be getting out my message, as even people who stay with a primary advisor might allocate some of their portfolio under me to protect at least a sizable part of their portfolio, as I can integrate inverse ETFs and un correlated plays to truly diversify, along with options.
Think you're right. Just kind of was going through some of my ideas to differentiate what I would be looking to do/open to doing vs. the status quo type allocations. My main questions are the logistics of starting it up and ultimately of course, raising AUM. I can take on risk at my age as far as going without positive income for a stretch, but not willing to wait forever, either. I suppose advertising in local papers or even radio ads would be on the table, but figuring out what is cost effective with all that seems difficult. It seems doable enough to get a bunch of few hundred k clients and get to 5mln with 2% fee and be at 6 figures, and I would not be looking to setup some big apparatus of a firm; just myself, and hopefully the custodian brokerage would help with a lot of quarterlies and things, while I would probably have legal help from whatever RIA assisting attorney firm I began the whole thing with. I figure there are some folks who haunt this site who might have some advice about all this. I really think I am something of a throwback in terms of being very risk averse like many, but understanding the importance of taking on warranted risk, and looking at it as it's risky to just sit in a ton of cash, too, because that's betting the dollar holds up and implicitly debt/deficits get in line, govt spending decreases, etc.
Oh Jesus. Let me jump in here. OK, I have some VERY successful friends in this business and I know a LOT about it. So you can take my advice or not, it makes no difference to me, I'm not charging you for it. Before I start, how are you not in a major city if you traded prop or did you leave town? OK, let me start by saying. NO. You have this all wrong. RIA business is all about SALES!!!!!! There is NO trading. There can't be any trading because there is no time for you to make "discretionary" decisions. You have to be selling all the time and I mean ALL the time. Let me start by saying this, if you do not have 100 million in assets in 3 years you will NOT be in business. Even with 100 million your take home will be small. There is no "2%" fees. This business is VERY VERY competitive thanks in part to robo-advisors who have taken over and also due to the fact that most very very good advisors are down to about 75 bips annually now. No one will return your phone call at 2%. Next, in order to take a percentage of profits from anyone's account they must be qualified in your state of practice. In most states that means they invest a minimum of 750k with you or you cannot take p&l sharing. Now.....this 75 bips.....you don't get to keep it all. You will have to share that with your firm. Even if you go with someone like LPL which basically allows you to run a bare bones operation, you will need to give them at least 20% of your fees. At more reputable shops you will be paying out 40% to 60% of your annual fees to your firm. My advice......do NOT go with these do it yourself shops. Go with a bigger brand name. They will feed you clients to some extent but more importantly they will cover all the overhead in your seminars and sales literature and this overhead btw is huge. I have two very close friends in this business. One at UBS that manages close to 500 million. Started with nothing. Kept getting all the clients from the other guys who quit and over time built a big book. Another buddy of mine is in Chicago and manages close to 500 million as well. Both these guys have different approaches but the common theme is they have been at it for years. They sell NONSTOP. There is ZERO time for trading or talking to clients or "carving out a niched" as you put it. I am telling you right now, with 20 million in assets you will not even take home 50k a year. I'm DEAD SERIOUS. This is a BRUTAL business and it's NOT for trader types because trading is NOT what you will be doing. You will dress up, you will travel all over the country doing pitches and seminars and you better start hiring staff (comes out of your pocket). The robo-advisors are killing it in this business partly because they are cheap (avg about 20 to 30 bips in annual fees) and they work. I'm sorry man, but anyone under 100 million in assets might as well be tending bar because there is more money in that then as an RIA. My buddy at UBS didn't even start getting out of debt until he crossed the 250 million threshold. I'll be happy to answer any questions you have. I'll even put you in contact with these guys if you want.
Mav, I would be looking at starting a solo shop. I would be the sole IAR at my own RIA that I would establish with one of these RIA atty firms, for up to $10k, and from there obviously it's all about getting AUM. I think there is a 'personalized', 'customized' trend going on across many industries and I think the investment game has yet to see this, but I think there is a niche for it. I think a lot of people don't realize the kind of risk they truly are in with the stock market. I think there is a dearth of talent on the part of advisers not even from just a pure PnL standpoint, but more importantly in this kind of fiduciary role, in awareness of the risks that people have. I feel there is an autopilot nature of 'it's the time in the market that counts' and the standard hedge is bonds/bond funds, and don't understand the prospect of 'black swan' where rates skyrocket and most stocks don't like that, and the dollar weakens as higher rates needed to clear borrowing markets. Again, I understand the difficulty in expressing bearishness in such central bank manipulated markets, but I am at least aware of the dangers and open to how bad things could get. I'm not even a big time equity research kind of guy, as I think there are just inherent limits to that in terms of 'edge', but I obviously know the major metrics and specific issues with whatever company it is. I'm more about major positioning, because while there are defensive sectors, largely the SPX going down a ton isn't going to take prisoners, and sectors are all going to go down a lot. Security selection aside from certain defensive names that are lifetime holds, basically, has its limits,I think one could argue. I understand the difficulty in not being at least under say an Edward Jones umbrella to have that brand name. But I would be doing sales there, too, and not getting the discretion I would be looking to have, and I would have to totally take commission which is worse than if I were running my own shop. It's a hard process, but I have always had a salesman nature to me, and I talk to people about the market, even people who wouldn't have much a clue about how markets work and have never looked at so much as an SP500 chart, and can relay what is going on in different sectors, and ways to capitalize on things and the danger in just assuming 'I should buy oil because it will inevitably go back up'. The bottom line is I don't doubt my ability to relay to people the kinds of things I'd be looking to implement and what would differentiate me. I did go to one of the top non-Ivys and I live in a big metro area and while I don't have all these connections, I do have good standing in my area generally, and I wouldn't have a hard time explaining what I did previously and how that will benefit me going forward. I think it's even overlooked how little some advisers know about market structure and comprehending just what is going on with days like Aug 24th crash. Including the arbitrage available, although that wouldn't be much relevant with a wealth mgmt job but realizing certain major ETFs are off from their underlying, that is major opportunity anybody who has the ability to capitalize on should. But the main thing there is understanding of liquidity and we're already seeing that in riskier funds. This isn't trading. This is an adviser position and my main value add in addition to the usual things one would have to know to pass the exam and get licensed, would be my skill in understanding opportunity in actual asset management and strategies with that, rather than mere SPY/TLT, or what many advisers do now which is outsource portfolio mgmt altogether. And in understanding how dangerous things really are when it seems ok at the present. Right now for instance there is compelling reason, especially if SPX gets below 1700, that we see 800 on SPX before 2500. How many people are really ready for that, and are overlooking what a rally this has been (mostly via the inflationary policies that boosted asset prices)? I get that holding some meaningful allocation to quality stocks at all times is wise, and dividends kept up with defensive companies, but even with tax events on booking profits, selling up here where there is now evidence a major top could be in (not saying sure thing, but for first time in awhile, there is evidence) is wiser than riding it all down only to hope to see these current levels. And if we got here, it would be like Japan and they haven't gotten back to decades ago levels, and it took massive JPY devaluation just to nominally go up to here. I happen to ultimately think stocks WILL be much higher than current levels looking few decades out; it just will not be much 'intrinsic' so much as inflation boosting everything in price. So I think a total cash allocation is riskier than an allocation with equities; I understand that. Pure logistics-wise, I don't understand why the high #s in terms of AUM are needed? I would never be complacent, but running my own shop, and maybe someday hiring a person or two to help, but to start out, just me, getting say $10 million, I would not be afraid to charge a higher than industry avg rate and I see 6 figures in fees at the very least from all that (not saying getting even that level of AUM is easy; that's my main concern/challenge) and I don't think yearly costs are that much in terms of overhead, even if I ultimately hung a shingle or at least leased an office at cheaper place. I think statistically based things like I'm sure a lot of robo advisors do has major flaws, and they just get hidden when things seem to be going well with stocks at such high levels. There is plenty of turbulence from high yield to commodities to sovereign debt and sovereign wealth funds with less from oil now. I'm not looking to go big, big. I see a trend to more local, personalized in so many sectors of the economy, and think there is a place for that in investment. I think a lot of people don't realize that if the market is going back to '08 lows, for example, a buy at SPX 1300 is worse than even now, probably, one could argue, because here at least the chances are still decent that another 30% higher is possible in this whole bull rally, whereas if we were at that level, chances are high that it is going all the way down. That gets subjective, but the bottom line is it's integrating wave theory with how when things get too far from the momentous highs, it cleans everybody out to the lows/overshoots/etc. I think I have a lot of savvy about risks of seemingly awesome strategies like high dividend commodity based companies, and how yield pigs usually get crushed. And if one has conviction, maybe selling puts to slowly enter a position is wiser to get involved. As you pointed out, it's less about all this strategy nuance, and more about raising AUM and not being complacent. I feel to an extent reputation builds more AUM, even if I go awhile with only a few 100k even under mgmt. I understand the risks of being a one man shop and how some people would not like that, but I don't think that is a deal breaker altogether. So I'll gladly listen to any rebuttals, but also advice on the kinds of advertising needed to get my name out there. I should also point out, I'm in a wealthier suburban area of a major metro, skewed more towards smaller further out suburb, not in some big city, so while obviously not all clients from this area, that is something of an advantage, along with not being in a saturated finance market although there are obviously plenty of competitors and established firms. Lastly, I want to do as well as possible, but if I felt i could comfortably take home 75k clear and away in income few years in, with upward trajectory, I'd be fine with that. I'm not coming from any big firms or anything, so no non competes or anything like that. It would be hard as heck I understand to raise AUM so organically, but I've got some 'on paper' credentials with the work I have done (trading was at a reputable firm, and I had some success, but the payout structure just too hard with the limited scalability of what I was doing, and just IMO not worth it unless willing to constantly be waiting for big moments and also regulatory concerns on some things). I ultimately feel like taking the chance and building it from scratch would pay off majorly down the road and get me into a good long term situation and the perks of running my own shop. So any comments addressing the feasibility things I'm specifically talking about would be appreciated. Thanks
Might as well start a CTA and sell premium. It's cheaper and you just need a few rich rubes to fund overhead.
Looking for something that can list for the long term. The one thing about an asset allocation/willingness to include strategies with unconventional assets, is that when things get bad is actually not an issue from the business POV, because that's when people realize the value in having somebody who can guide as to what is going on and the kinds of risks. Buy and hold I think is really not going to be so simple because the tailwinds of artificially depressed rates and credit expansion are now on fumes, and what is left is massive debt and distortions that need to be liquidated. Essentially I'm looking for advice about going about advertising and getting AUM. I'm not trying to start some national company. I wouldn't be against having out of state clients, but I would primarily expect from my home state. I don't anticipate looking to get to some major operation; just a small firm that specializes particularly in investment management and is 'defensively aggressive' because a lot of people know they need to get away from purely sitting in cash, obviously, but don't want to have their hard earned savings be at risk in what is IMO rightly perceived as a casino. The market going up is a false positive about the real economy, as Chicago PMI among many other indicators of late have demonstrated. The hardest thing for me to process is to get to where I can explain my ideas to people, person to person, because definitely I'm not going to get where I need to off pure family friends and things like that. I like my insight into the market and how bad things can get, and have seen a lot despite only being in the markets for about 4 or 5 years. One of the reasons I'm probably moving out of trading is because I have a healthy skepticism and risk aversion, although I fully believe in taking risks not for the sake of it, but because it is also risky to 'play it safe' and sit in cash, because that implicitly means one thinks the dollar has no headwinds. I've definitely thought through what kinds of things I would put in newspaper ads, and radio ads. I want no part of the 'doom and gloom' crowd but I do fall into that camp in many respects about the real economy while recognizing the forces working against those bearishly inclined. Mav, I am not looking to take any % of peoples' profits. This is a fiduciary RIA, not a hedge fund. I am seeing reports about firms raising AUM rates, actually, sometimes due to strains but in any case, if the value add is there and distinguished from autopilot fee-takers, I think something above average is not insane. I don't see what would be problematic about having a laddered fee schedule based on the client's assets, and averaging say 1.5%. Yes if the market kept walking to SPX 5k and TLT didn't implode people would regret having an advisor, but that is simply not likely. If one really thought that, then just buy VTI or SPY and forget it. My point is that buy and hold is not going to be so easy going forward, and there could be some implosions if maybe sovereign credit markets tighten up, and the US ultimately wouldn't be immune, so SPY and TLT could both sell off, and all of a sudden a conventional portfolio with no other allocations is very vulnerable. I don't doubt with manipulation 10 year could see a 1 handle ultimately, but I have a vein of 'vigilante' in me, also, although this is getting into the weeds on investments. My point is is that helping give people a road map and with a customization based on age, like if a person has the time to ride out a down wave or if they need a safer play, maybe even an annuity in some cases, as they can't have their portfolio plunge if they're 60+, that is what I would bring. I definitely think if I were to go into the RIA route, I would go indy before ever working for Edward Jones or whoever. I can say that much. I'm not trying to (at least not initially) work my way into the big leagues as far as getting into the NYC space of funds and attracting those folks' capital. I think there is plenty of potential AUM elsewhere from people not as versed in their options.
Mav, Just also forgot to say thanks for your in-depth info and perspective. One other thing is that I'm not looking to manage big pension funds' money and organizations. I honestly don't mind the idea of having to go out and get involved at different conventions and seminars and sell myself. But I also don't mind the idea of it needing to take awhile to raise the AUM. Younger people obviously have their accounts grow, for one. Combine that with much higher wealth people in their 50s or so, with a few million who might at least be fine with a few 100k that I would manage andcustomize as being very defensive and more of a hedge for their overall wealth with options and inverse ETFs (not stupid levered ones, but vanilla ones) and I think there's a way to get to meaningful AUM. I see this as the most relevant way to utilize the skills I know I have attained from the past 5 years where I've been very involved in the market and all its nuances, and beyond the actual work, my own study and article reading and data studying. I could go into more conventional i banking but it would not be as pertinent, and probably more difficult since I haven't been on that track now unlike many who went through the degree I did at my school.