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Have a HNW client interested, would love some advice from established fund/RIAs


Shooter MacGavin
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To current active managers / RIAs,

 

I have a client interested in investing some money.  let's say its between $1M and $5M.  I think I have a pretty good idea of the pros/cons of a fund vs. an unregistered RIA structure for the moment and i'm choosing to manage through an IB friends and family account for the moment.

 

if there's more money to come down the road, I'll roll into a fund structure.

 

as of right now, its early so I can iterate if need be - in other words....nothing is in writing yet.  I'm talking to lawyers, IB etc.

 

one issue right now is fee structure.  I proposed an 0/25 structure, but I think that was a bit idealistic.  I won't have working capital, and I'll need to keep my own capital in cash to weather for a few years so this isn't ideal.  I may go back and propose a sliding fee structure - the more capital , the less of a mgmt % and greater performance %...

 

Anyone have any suggestions on anything that they wish they would have done differently / regrets / or anything/vendors they would recommend? 

 

If you don't wish to share here, would love to hear from you in PM too.

 

Thank you very much in advance for your time/ comments

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A lot of small managers start out with 0/25 and a 6% hurdle because that's what Buffett did.  That is not very deep thinking.  In fact it is not even accurate.  Buffett did not offer 0/25 until later - he gave three options early on 0/33 6% hurdle. 0/25 4% hurdle and 0/16 no hurdle.  I would suggest giving multiple options.

 

I chose to start with a base fee and I think that was the better choice for me.  It creates more stability for the business which is important for both you and the clients. 

 

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Tim,

 

Thank you.  Yes, I proposed 0/25% because that's likely the only fee structure I would pay if I were investing with someone.  Of course, it has its origins in the Buffett partnership and comes from a desire to do right by investors.  But you're right, I'm reading Ground Rules, and he himself had various structures as you mentioned. 

 

Would love to hear other people's thoughts on fee structures that they use if they're willing to share in the group or privately.

 

Thank you.

 

 

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Remember that the regulatory environment is much different now compared to Buffett's time as well. You may not charge performance fees in most states if your limited partner is not a qualified client (higher standard than accredited investor). That means that if you do a 0/25 and you accept friends and family money and your friends and family are not HNW individuals, you will not be making any money at all no matter your performance.

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Remember that the regulatory environment is much different now compared to Buffett's time as well. You may not charge performance fees in most states if your limited partner is not a qualified client (higher standard than accredited investor). That means that if you do a 0/25 and you accept friends and family money and your friends and family are not HNW individuals, you will not be making any money at all no matter your performance.

 

In this case I don't have to worry, but is that still true if you're unregistered?

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Depends on the state. Definitely consult an attorney experienced in the field before you get going, or talk to RIA in a BOX. There is much more to getting started than meets the eye. Generally, though, you will have to register as an RIA or you will be limited on what type of investors you can accept. If you are planning on accepting any friends and family, then in nearly all cases you will have to register as an RIA, with the primary exception to mention being NY state.

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I've always wondered, why did Buffett change from 33 over a 6 hurdle to 25 over 6? Did he think the former was too expensive for the value delivered, and corrected it downwards? Or was it because he had a lot of capital by then and could afford a discount?

 

By offering 0/25 with a 6% hurdle it was enticing to all the three other groups.  It was always going to be better than 0/33 with a 6% or 0/25 with 4% (which 80% of his investors had chosen) and up to ~18% annual returns it was better than 0/16 with no hurdle.  In other words it was a generous offer (i.e. price cut), and simplified the accounting which he did in house. 

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Depends on the state. Definitely consult an attorney experienced in the field before you get going, or talk to RIA in a BOX. There is much more to getting started than meets the eye. Generally, though, you will have to register as an RIA or you will be limited on what type of investors you can accept. If you are planning on accepting any friends and family, then in nearly all cases you will have to register as an RIA, with the primary exception to mention being NY state.

 

thanks.  Yes, I'm in discussions with attorneys at the moment.  Besides cost, what's the disadvantage of setting up a fund structure instead? 

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