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Seven steps to starting an investment advisory business


Compared to just five years ago, starting an investment advisory business is much more difficult and complicated. Constantly changing regulations, difficulty in the current credit environment and knowing the best service providers for your organization are just a few of the issues you need to navigate.

And even once you resolve those details, you still must address one of the most important issues facing your new business – raising capital to manage. Investors have become very conservative with their investments, and convincing an investor to allocate assets to a new investment advisor is not an easy task. The first part of the process involves getting an introduction and setting up the actual meeting.

Be sure to first consider your potential investors, from the type of investor you expect to attract (such as high net worth individuals, institutions or pension plans), as well as what those different investors will look for in your organization. After you have identified your targets, it is time to consider where and how you will meet that audience.

Before you schedule that first meeting, be sure to have taken care of the following areas:

Construct a solid business plan. You are asking investors to trust you with their capital. In return they want to know you have a solid business plan, that you understand how to run a business and believe that you will still be in business two years from now. Many portfolio managers who are starting out know how to do research, trade securities and have good ideas, but that is not enough for investors to give you capital, especially larger investors who will expect that you have developed a strong organizational structure and have considered your business operations from an accounting, investor relations, budgeting and control point of view.

Can you describe where you see your organization in two, five or eight years? Have you worked out a budget based on different revenue streams and expenses? Have you considered how you, personally, will live while you ramp up your operations? I always ask a start-up or new fund these questions. In today’s world, investors want to be comfortable that you will not be using their assets to live on and pay the bills, and trust that you will not have to take extra risks in hopes of hitting the home run you need to keep your business operating.

Establish good policies and procedures. Good policies and procedures should be in place before you begin operations, especially as they relate to who performs what functions, and who will oversee operations. Be sure to consider what the best practices are for your industry and how you can leverage those. You may be a small organization with a few people, but it is important to make potential investors comfortable that you have thought about your organization operationally and have put policies and procedures in place to safeguard your business and the investor’s assets to the best of your ability. It is never a bad idea to document some of your key items; investors want good returns, but more importantly, they want to know that their assets are safe.

Plan for continuity of your operations. Have a plan as to how you will function on an operational basis and be able to clearly explain that plan to potential investors. Have controls and proactive monitoring in place from the start so investors feel comfortable that you are in control operationally. Investors will want to know that you have an organization behind you, and a team of people in your organization that support you. Do you know who will be your back up if you are on vacation, or not available for a day or a week? Potential investors will want to know who will be watching and protecting their investments in the interim.

Choose appropriate service providers. You should choose service providers that will not only help your organization, but that fit into your strategic plan and complement your operations. While cost is always a concern, remember that service providers are an important part of your team and they can add a level of confidence in the minds of your potential investors. This does not mean you need to hire the largest and most expensive service providers, but that you should consider the ability and expertise of your providers and how they will help you grow strategically. You want to be able to leverage their expertise and know they are capable of servicing you appropriately both at your current level and as you grow (keep in mind your strategic plan and where you want to be five years from now). Your investors want to know you are working with organizations they feel comfortable with and who are experts in their respective industries.

Think strategically. Again, be sure you put together a plan and an organization that is not just a fit for today, but that is forward looking to your future.

Sell yourself and your organization. You are the best salesperson for your organization. Unless you are going to have a professional marketing team, you are going to have to sell yourself and your organization to potential investors. It might not be easy, but recognize that potential investors are likely meeting with several potential managers. You have to be able to make a positive impression, get them comfortable with you and your organization and be prepared to make sure they know why they should invest with you. Remember, at the end of the day, you have to be ready to ask for the investment.

Prepare for the interview and follow-up process. Be prepared for your meetings. You will have to be able to address the items above, discuss your trading strategy and answer other investor questions that may arise. The process can be long, especially with institutional investors, so remain diligent (along with everything else you need to do). There may be significant due diligence questionnaires from large institutional investors, so be ready to respond. Have a plan to follow up with potential investors.

These are just some of the key items to prepare before you meet with a potential investor. Many institutions will want to see a one-to-three year track record before they invest with you. In addition, they will have certain allocation minimums and limits on the percentage of your assets they can represent, so even if they want to invest, be prepared that they may not be able to invest due to your initial asset size.

Be realistic in targeting your potential investors. Meet with your friends, family and personal contacts to raise the initial $2 million to $3 million investment to start your organization. With hard work, dedication and planning, you will be prepared to succeed.

Alan Alzfan is a partner and the national hedge fund practice leader with RSM’s Financial Services Group.