Unregistered California investment advisors can't charge fees at IB?

Discussion in 'Professional Trading' started by Jay77, Mar 8, 2017.

  1. Cyrix


    Thanks so much for your detailed reply.

    One thing unclear to me is why you didn't choose route 1, the RIA route.
    From your explanation it appears that the RIA route requires much less paperwork and maintenance, but is still able to generate client income on IB. You have even passed series 65, but didn't end up being a IAR/RIA.

    Is there any particular disadvantage of managing client money on IB by creating an LLC as a RIA and the trader becoming an IAR. Could you please give some more insights? This is actually the route I am seriously considering, thinking that it requires less administrative work/costs than a hedge fund (or is it not the case?). I am also in California.

    Thanks again.
    #11     Jun 23, 2019
  2. Jay77


    > 1) One thing unclear to me is why you didn't choose route 1, the RIA route.
    > 2) [Does being an RIA] require less administrative work/costs than a hedge fund?

    At first, I was where you are now, exploring which routes to take, so I chose to explore both to some degree. After I started the hedge fund, then there was no remaining need to register as an RIA because the fund would be exempt from registration unless and until it amassed a very large AUM. Now that I've closed the fund, I might personally reconsider the RIA route. I don't -need- to be an RIA because income is already fine, but being an RIA could still have advantages for others. There are entities and people I know who'd like to invest with me, and such interest would likely continue to grow as the good track record continues. I have some time while I could still register as an RIA if I like... The series 65 test passing result is good for 2 years after completion.

    I don't know if an RIA setup would be easier to maintain than a hedge fund. I know running the hedge fund was an awful lot of maintenance, but I have never been an RIA. Maybe someone else in this forum could answer this question? let me know if you find some opinions on the topic. I'd be curious to know.

    > Is there any particular disadvantage of managing client money on IB by creating an LLC as a RIA and the trader becoming an IAR.

    I tried to think of "cons" of being an RIA, over the hedge fund. I can't imagine there would be many downsides, but this is what I thought of.
    1) You'd have to pass the 65 to be an RIA. Some people may not want to, or think that they can.
    2) Client accounts would be segregated with an RIA. At the time I made the hedge fund, I thought this might possibly add extra daily trading work. Because, I use algorithms. I ideally need all client accounts to have the -same state- (same positions) at all times, with the exception of the number of shares purchased. With one hedge fund account, there can be only one state, so problem solved. However, with multiple client accounts, what if one client gets an order filled and other clients don't? I'm not sure how RIAs typically handle this situation. Especially if they have -many- clients. Do they manually adjust each account? Are there broker tools to help? (I would hope and guess there are.) At the time I had just imagined one account might be simpler to administer than many accounts. However, I have since realized that segregated accounts have a huge advantage as well. Namely, segregation creates -much- simpler client accounting because you no longer have to track what money belongs to whom. (All the money in each account belongs to the single client.) And simpler accounting means simpler (or less) third party services may need to be purchased and dealt with. Side note... it turned out that in practice the hedge fund did have at least a few different broker accounts and subaccounts, that got used for different purposes. So it was not quite as much simpler as was imagined.
    3) Billing of fees might theoretically be a bit simpler with a hedge fund, because any and all fees are just withdrawn from the fund account. I'm not sure how performance fee transactions work with RIA accounts. I don't have that experience with the advisor accounts.
    4) Margin and trading permissions may differ by account. With a hedge fund, there is only one account that needs to "qualify" to get maximum margin permissions, and the rights to trade all security types. With a smaller client account (under 100k), they may not qualify for portfolio margin, though I don't know for sure. I suppose in that case, you could just set position scaling to a lower value, but it would have an impact on the returns for those particular clients.

    I'd be interested in finding out if being an RIA could be simpler to maintain than a hedge fund, on a monthly and yearly basis.

    #12     Jun 24, 2019
  3. Jay77


    Another possible strategic difference:
    5) A hedge fund could theoretically avoid disclosing exact trade history, and therefore could have an easier time keeping strategies confidential if needed. With an RIA, trades occur in the client account so I am unaware of a way that an RIA could keep trade history private. Note that I'm speaking only of trade history logs (exact entries and exits), and not things like performance history reports. Summarized performance and financial reports would be disclosed by both types of businesses.
    #13     Jun 24, 2019
  4. Cyrix


    All great points. Thanks so much for your time and information.
    As you have brought it up, this 5) is actually pretty important. It may make the RIA much less attractive because it does increase the risks of my algos being reverse engineered.
    #14     Jun 25, 2019
  5. Jay77


    For the benefit of anyone interested: I was able to confirm with IB support that when using an Advisor account(aka RIA/IAR account) with managed accounts/client accounts at Interactive brokers, there is NO option to avoid disclosing full trade history to clients. All trades are transparent to the clients.
    #15     Jun 27, 2019
  6. Robert Morse

    Robert Morse Sponsor

    This is never the case at any broker with an SMA. You need a pooled asset, not in the customer's name.
    #16     Jun 27, 2019