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Apr 15, 2008 1:05 am

I have spent a lot of time on research, formation, has been strenuous to say the least.  I'm glad I did it, though--I would not have learned nearly as much if I paid an attorney to set me up.

Anyway, for those of you that have a RIA: Did you fill out brochures for a wrap program?  It seems like you need to fill out schedule H if you charge a percentage of AUM and a percentage of profits.  I would like to say that I don't sponsor or manage a wrap fee program, but there seems to be no way around it.

Also, if on occassion I get a case where I need to represent myself as an expert witness or create a financial plan, can I charge a flat/hourly fee if I don't have a designation such as a CFP/ChFC/CFA?  

Hopefully some members with more experience will shed some light on the subject...thanks. 

Apr 15, 2008 1:38 am

NL -

On the wrap-fee program - We opted NOT to go that route. I’m not sure why you would think that you have to offer that type of service for your client. If you are offering a base mix of ETFs and funds, you shouldn’t have excessive turnover that would be cost prohibitive for your clients. And, since the trading costs are getting lower and lower, it’s not that large of a charge for the client to absorb.

If you offer separate account managers, yes, it would be wise to go the route of a wrap program. However, your custodian (mine is Fidelity) should also have a wrap fee-sponsor for their separate account business. In cases like that, the wrap fee makes sense.

If you offer a wrap fee program, understand that you’ll be on heightened scrutiny from the perspective of the SEC. It creates a huge conflict of interest, and it just doesn’t make loads of sense. The problem with many advisors that come from the wirehouse side of our business is that we don’t want to burden our clients with the additional costs. Again, it’s a small annual portion of the expenses for your client… I’d reconsider the use of a wrap program sponsored by your newly-formed RIA.

Our clients didn’t care one bit about paying the small transaction fees. They amounted to virtually nothing in comparison, and when it was explained that those small fees was how Fidelity made their money, the client’s understood. Very few had any further questions after that discussion.

Also, understand the pure economics of what you are considering. 200 clients, each with 8 mutual funds in newly-formed portfolios. That’s a potential 1,600 mutual fund trades at $15 per trade, not counting the trades OUT of what they’ve recently transferred to your new firm. Those trades alone represent $24,000 in fees that you will be paying on behalf of your client. WOW! Unfortunately, that will cause you to raise an eyebrow each time you are even considering making another wholesale portfolio adjustment… therein lies your conflict of interest.

There is a way to manage a practice without a wrap program. I don’t see the need, and I wouldn’t suggest it. It goes well beyond just economics… that type of conflict of interest shouldn’t even be brought into your practice.

Just my $.02 on that topic.

I’m not sure on your other question - I don’t think you need to be a CIMA, CPA or CFP to be considered an expert witness. But, that’s not my gig, and I couldn’t give you advice on that matter.

As for preparing a financial plan, yeah… you can charge for that if you feel that people are willing to pay. Financial planning fees are separate from your investment management fees, and you should have clients sign a different ‘consulting’ agreement for that type of relationship with your firm. It should spell out your hourly rate, or the flat fee you will be charging for your financial planning services.

Good times.


Apr 15, 2008 2:38 am

That is far more than I expected.  Thanks so much!

  The thing about my plan is that I will be trading monthly maybe even twice a month depending on market conditions.  I found that Interactive Brokers has a nice platform for small RIAs: the structure is set up so that clients' funds are pooled in a master account and the manager trades once (omnibus style).  IB allows for monthly fee withdrawals and they provide statements.   I'll re-read your post...I'm sure I missed a thing or two.  I won't be using mutual funds a whole lot, and if I use ETFs it will only be to hedge other positions (short term).  So my main question is this: If I have a specific short term strategy, is that considered a wrap program??
Apr 15, 2008 10:39 am

So my main question is this: If I have a specific short term strategy, is that considered a wrap program??

A wrap program has everything to do with HOW you bundle the cost of working with you, and it has NOTHING to due with how you manage the portfolio.

There are two costs that your client is faced with:

1.) Advisory Fees
2.) Transaction Costs

If you WRAP them both together, you will be deemed a sponsor of a wrap program. If you unbundle the two fees, and your client is responsible for the trading costs, you do NOT have a wrap program.

Again, it has nothing to due with what you do.

Apr 15, 2008 1:26 pm

[quote=NaturaLogarithm]I have spent a lot of time on research, formation, etc…it has been strenuous to say the least.  I’m glad I did it, though–I would not have learned nearly as much if I paid an attorney to set me up. [/quote]
Captain has given you excellent advice concerning the wrap issue.  I’ll add a more general comment.

You may well have learned quite a bit by not hiring an attorney to set you up, but please realize you may also be setting yourself up for potentially more serious problems down the road by not having the benefit of experienced, professional legal advice.  The wrap question highlights just one example, and the flat fee question a second.  There are several other issues that you may not have even identified yet as well.  Any one of these could cause you some serious problems down the road.  I fear you may not yet even know what you don’t know.

I do not mean to throw cold water on your efforts, but a few dollars spent on proper legal counsel at formation will likely save you much more in the long run.  You don’t get any extra credit for degree of difficulty.

Think of some of your clients - CAN they invest on their own?  Sure they can.  SHOULD they do so?  Depends, but for most people they may know just enough to get themselves into trouble. 

Good luck!

Apr 16, 2008 1:30 am

I agree with Morphius regarding the critical importance of legal counsel.  I set up an RIA firm on my own three years ago without any legal help.  It is definitely cost effective in the short term, but in the long term the risks of litigation are too great.  While you might not see the litigation risks materialize, it will often create an additional burden of stress on the independent advisor.  We provide our clients with expertise that relieves the stress associated with ignorance and inexpertise.  The same applies for legal advice and accounting services.  Pay the extra money now and reap the benefits of  "peace of mind" in the future.  It also will prevent you from doing the same thing when it comes to larger tasks later on, like creating the private placement memorandum and limited partnership agreements for a hedge fund.  In my stupidity I completed it, but at a great cost (it consumed over a month of my time and kept me from focusing on my existing and future clients). 

  Where there is no guidance, a people falls, but in an abundance of counselors there is safety. Proverbs 11:14  

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From the trenches,


Recon Scout