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Fee Structure for RIA / Money Mgmt Business

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Oct 28, 2014 7:40 pm

Hi folks,

I've been contemplating forming an RIA business for months now, but need some help assessing the viability of what I'm offering and what fees I should charge.

First, let me start by saying my professional career has been in options trading (exchange listed equity options, to be precise).  I previously worked as a trader for options market-making and proprietary trading firms in NYC.  I currently hold both Series 7 and 66 licenses.

I'd like to use my knowledge and expertise to launch my own investment management company.  The investment strategy would involve buying diversified equity index funds, but also using options overlay to generate additional returns and hedge the portfolio.  Very basic stuff, compared to the type of trading I used to do at my old firms.  However, I notice that very few RIA firms out there offer their clients this type of investment service.  It may be because of lack of options knowledge, but more likely it's because this involves some time-consuming active portfolio management.  Since the option positions need to be adjusted and rolled at least once every 2-3 months, it will require a lot more work.  I'm sure most RIA's would rather collect 1% AUM as mgmt fee, and stick clients in a buy & hold portfolio of index funds that don't really require active management.  Less work that way.

This leads to my question regarding the fee structure... if I were to offer this type of active investment management using options, how should I be compensated?  It would seem unfair to me if I only charge 1% AUM like other RIA's, since I'm actually spending a lot of time managing the portfolios.  But if I charge too high % AUM for mgmt fee, clients might not want to invest w/ me.  Using my options strategy, I can generate better risk adjusted returns for clients (EX: my model portfolio is out performing S&P by 500 basis pts so far this year, with less volatility).  I figure there's got to be a way I can fairly get compensated for the work that I do.  I thought of 1% mgmt fee + 10% profit share (much like a hedgefund), but that means the investors will have to be accredited in order to share profit.  Any other way I thought of is to simply charge 2% mgmt fee with some sort of sliding scale for accounts >$1M.

For what it's worth, I've also considered setting up a hedgefund, since this would be the easiest way for me to manage all my client's money in one pooled portofilo.  However, the startup cost as well as on-going maintenance cost are so high that I don't think it would be worth the risk.

I would love to hear your comments and advice on what I'm trying to do.  Thanks in advance!

Dec 22, 2014 3:57 am

Without going the route of starting a hedge fund, you can just set higher minimums and different fee schedule for these portfolios vs. a simpler one. As your AUM grows, you can keep raising the minimums while grandfathering your existing clients.