By Jody Foster, President of Symphony Consulting
If the economic impact is anything like the 2008 financial crisis, the person starting an investment firm in 2020 may very well be you. For some, starting their own firm is a dream come true. For others, this may be out of necessity as many jobs in the financial services world will be lost, many never to return. This is especially true for senior investment professionals who may find their roles replaced by machines or those ten plus years their junior. Compensation never did reach pre-2008 highs and the industry has seen tremendous pressure on fees and margins. If starting your own fund company or RIA firm is in the cards, here are some tips for a successful launch.
Own Your Goal
Do you want to manage a $1B financial planning firm? Are you looking to have a $10B mutual fund? Is a $200M private fund your dream? How about a $50M RIA you run yourself as a lifestyle business? The key is to know what type of firm you want to build so you can start with the proper legal structure, identify the best service providers that fit your strategy and understand the right investors for your strategy.
Design the Optimal Structure
I often joke that the optimal number of partners in a partnership is “one”. That is based on years of anecdotal evidence. Lawyers tend to make out well when partnerships dissolve but everyone else is collateral damage. If you can’t go it alone, be very careful vetting a partner, and set up the appropriate legal protections for you and your family.
Avoid Rookie Mistakes
Like a great value stock, the key to long term success is starting off on solid financial footing. Don’t find yourself in debt right off the bat. The two most common mistakes when launching a firm include taking on expensive real estate by locking in to a long term lease and hiring staff in anticipation of growth. Barriers to entry are low. You truly need a computer, a phone and basic common sense. To start, you can meet with clients and prospects at their office, home or even a restaurant. That makes it convenient for them and doesn’t require a flashy conference room. If you do think a conference room and meeting space is imperative, there are low cost options. The first being serviced offices that often allow for a month to month contract. The second is finding a spot at a firm that has experienced downsizing and has space to sublet. For staff, it is important for the owner to be involved in every aspect of their business at the outset so they know what skills they lack and want to be filled by staff. It is important to hire slowly as staff costs today are much more than just salary given the exorbitant cost of health care and other benefits.
Understand Your Investor Base
Small firms and new launches must rely on friends and family to get them to $50-$100 million in assets before even the smallest institutional-like investors will begin the due diligence process. Take out a spreadsheet. The first column is the name of investors you will call on. The second column is their estimated liquid net worth. The third column is the estimated amount they will give to you. Add that up, take ten percent of that number and that is generally what you can expect to raise in the first year or two. Asset-raising is by far the greatest challenge to any small investment firm. Understand it is a long sales process with tremendous competition so be prepared to spend the majority of your time each day connecting with prospects.