Question 1: When do I need to register and how long does it take?
Forget about the legal liability; if you’re going to trade client money, you need to register. While exemptions are available, taking advantage of them slows your upside potential. Soliciting clients without registering is illegal. You also never know how long it’s going to take; in reality, to get that registration completed, plan on it taking somewhere between 6-9 months – or longer – to get both your Series 3 and your registration.
Question 2: When should I start taking clients?
When you’re registered. If you take a client and you take off, you want to be SURE your registration is in place, which goes back to the first question! The clients you want that will get you to the next level you want to get to, want you registered NOW.
Question 3: What’s an NDA? Why do I need people to sign contracts and NDAs –
You spend a lot of time and effort in building a trading system you feel is unique and then don’t bother to protect it. Strange…
Question 4: Which is more important: an attorney or an accountant?
You need both an attorney and an accountant. You have recordkeeping requirements that will be audited by the NFA. You have legal documents (such as NDAs and contracts) that you’ll be signing with investors.
Question 5: Legal and Accounting: Can I do it myself or do I need to hire someone?
As to an attorney: that’s the legal area. Unless you are an attorney, hire one! As to accounting, if you feel you can do the recordkeeping job that meets your regulatory requirements, in-house, hire a bookkeeper and possibly a compliance consultant but definitely get an accountant to review your work. Remember that “accounting” can include payroll, billing, trade tracking, allocations, shadow accounting, all sorts of things that will take your focus away from what should be your strength; your trading. One of the key benefits to hiring, besides ensuring that it’s done right, is that it gives you credibility when you’re small. You need more than one person to run a business; you need professionals and backup! It has just as much to do with looking professional as to needing the professional help.
Question: 6 How much does a decent accountant or attorney cost?
They can range anywhere from “not real expensive” to “You’ve got to be kidding!” Talk with 3-4 of each and draw your own conclusions. Each has to have experience in our industry. You don’t want to train them on your dime, which will result at your expense. And you’d better make sure you can talk to them; that you are both on the same page.
Question 7: Should I outsource my back office?
Yes. Clients are willing to take the trading risk but they’re afraid of fraud; why would they take the risk? Outsource your back office, but recognize that you’re not giving up the responsibility. The underlying responsibility is still yours; you need a “checks and balances” system. You need backup. You need procedural manuals. You need to know everything that you have and where it is. That’s where your “hires” come in.
Question 8: I’m thinking of raising money by having cheap fees. Good plan?
Trading is a business. Having “cheap fees” says a lot of things you don’t want to say like, “I don’t think I’m worth big fees.” “This isn’t a business, it’s a crap shoot.“ There’s no evidence that shows that offering cheap fees works.
Question 9: Then should I use a Third Party Marketer (TPM) or seeder?
You need to grow your AUM to get industry recognition, be it 25m, 50m or 100m. Using a TPM, cap intro firm or seeder is a way to grow assets faster. Recognize, however, that the cost can be up to 50-60% of fees. How do you find out who the right person is and how much the cost will be? Talk to a lot of people and find out what the average deal on the street is. Caveat: finding a TPM or seeder is the goal of all too many small traders. And those marketers and seeders identified have an abundance of traders knocking on their door and probably only do a deal with 1-3 traders/year. The best way to up your chances of finding a TPM or seeder is to be professionally presentable. It’s a beauty contest. Find a new TPM or seeder that isn’t full. Find people hiring, not people doing deals – the harder question is how to find people that are hiring? You have to compete for a client’s attention and have a way to get in the door. Knowing your strengths and weaknesses is key and then hire to backfill those weaknesses.
Question 10: What should I do to look professional in the eye of the clients? Regulatory, legal, accounting, risk management, marketing, IT; there’s a lot going on! Get Organized! What you have to remember is that somebody or somebodies have to do it. There’s no “not” doing it. So it’s really a question of if you can and/or if you want to do what it takes.
Question 11: What if I can’t afford do the things you recommend above?
You shouldn’t be in this industry. You have to be prepared to not have a client for 2-3 years OR use a different strategy; there are lots of people looking for smart people – well known firms. You don’t have to take the giant step of being independent immediately. You can be completely owned by a seeder to get the experience. You can do it part time – it extends the timeline but has the advantage of being cheaper.
Question 12: How have other people succeeded?
There’s no one answer to this question; no one path works for everybody. But they all had in common a burning desire to succeed, worked hard and worked smart. And some weren’t afraid to spend money and some have the first dime they made. They were all good at gathering information from knowledgeable industry people. They listened to opinions and formed their own answers that fit their needs, staying within the guidelines of compliance and didn’t cut those corners.
Summary: The Right SOP (Standard Operating Procedures) for Emerging Managers:
- Define a trading approach that you’re willing to invest time and effort in over the next “x” number of years.
- Once you have the approach, prove to yourself that it does work and will work in the future.
- Decide what you want to do. There are a number of options to people who have successful trading approaches. We’re assuming you want to utilize your trading approach as a CTA or a Hedge Fund
- Take the Series III exam
- GET OPERATIONAL AND GET ORGANIZED. Get an accountant, an attorney, a back office service, a backup person internally, some marketing and product delivery advice.
The biggest issue with emerging managers is that they don’t know the right questions to ask and they don’t know what they don’t know!
Have more questions? Ask away! And good luck with your new venture.