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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3630
Experience:  Providing Financial & Tax advice since 1986
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In negotiations with a two person state RIA to join as an equity

Resolved Question:

In negotiations with a two person state RIA to join as an equity partner. I will get a percent of AUM based on my initial equity contribution. I need help sorting this out. Where do I start?
Submitted: 8 months ago.
Category: Tax
Expert:  Lane replied 8 months ago.

Lane :

Hi

Lane :

I would think that as long as the contract is designed as terms of the sale, rather than you actually providing advice, registration wouldn't be neessary

Lane :

you'd just be a passoive investor

Lane :

Is that the nobjective?

Lane :

sorry for the typos "passive" "objective"

Customer:

I will take the series 65 after this agreement is made...will be a consultant prior

Lane :

what % of interest? AND what'e the business entity going to be?

Lane :

the 65 would just make you a rep... Seems that if you are less that 50% you'd have a case that you are not THE firm

Customer:

it's an 8 year old LLC, 2 money managers (50-50 ownership), provide investment advice to clients with securities / funds held by third party custodians of the client's choice

Customer:

i can provide an initial cap contribution for a percent of the business...that will determine the percent I get from AUM...I would bring new AUM and provide investment advice for the new and existing AUM

Customer:

or depending on what i think is best, XXXXX XXXXX cap contribution at all and rely for renumeration solely on aum%

Customer:

how do i value the company? how and when would i see renumeration?

Lane :

Valuation? Capitalize profits (their AUM less office lease licensing entertainment other expensews)

Lane :

I thinbk I would look at it from a return on your investment perspective

Lane :

Then what you bring in, should be ncremental to yo only

Lane :

Doesn't that make sense? You value what the company's worth now based on the income it's throwing after expenses ... They give you soe portion of that based on your addition to equitey ... the you get a reasonable advisory fee on top of that for what YOU bring in?

Customer:

when money managers say they are paid by %aum, when are they actually paid (quarterly?) and do they often simply reinvest their payment into the aum (presuming the funds are invested together)?

Customer:

yes you your question

Customer:

to

Lane :

Quarterly IS the most common, but that's by contract... I bill my 401(k) clients monthly ... most institutional platforms will let you do it however you like

Lane :

Typicall the fees are NOT commingled with the maganed accounts however

Lane :

MAYBE, that's a business decision

Lane :

IF so, they are broken outby account

Customer:

haha - i knew that commingling issue would resonate

Lane :

:) yes, worked in compliance for TOO many years ... but again ,ost of these folks use a service that breaks it all back ou ... If they're usng an omnibus account through a large trust company, the dollars ARE physically pooled for lower trading costs BUT broket back out by accountint and statement

Customer:

is it typical for a money manager of these sorts (state ria, 30M AUM) to be paid solely on fees based on $aum? what other source of renumeration other that %aum and %ownership if the ria sells exists (these two also provide research reports)...

Lane :

Well now you're getting into the business mode/potential conflict of interest part of things ... Regardless of size if they are FEE-ONLY (not registered reps of a broker dealer... brokers) then EVERYTHING is probably AUM and then if they do financial planning fees for the plans as well OR sometimes they will do a yearly plan as part of the package (for charging, say 1 to 15.% on AUM)

Lane :

BUT

Lane :

Now nI get to giv e MY opinion.... IF they're working from commissions from a broker dealer or by selling uinsurance they're not managers, they're comission sales people ... part of a distribution system for financial products

Lane :

When advising individual I slways say make them tell you whether they're nfee-BASED or fee-ONLY

Lane :

Fee-based means they've retained sales licenses (series 7, etc( and are charging commissions

Lane :

Sounds like these guys are probably fee-only

Lane :

Do you know what they have under management?

Lane :

How much?

Customer:

30M

Lane :

YOu have a feel for what they charge clients?

Customer:

i know they charge 1%aum but am not sure of any other fees. doesnt seem like that much money

Lane :

I was gonna say that 300,000 gross

Lane :

BUT 1% is reasonale and in today's market the folks that charge 1.5 and 2 are losing clients

Lane :

it's a fairly strong base for 2 people and the overheaa's pretty low

Lane :

Might be a good starting place... tell you one thing, the busines is moving more every day to that model

Lane :

In MY opinion ... go for the 401(k) and other pensions market

Lane :

Now you're adding 10 mil at a time

Lane :

No harder to manage

Lane :

and thats going to be the place where people will cntinue to npay advisers

Customer:

pensions as opposed to hnws?

Lane :

hnws?

Lane :

Home office?

Customer:

high net worth individ

Lane :

tow very different markets

Lane :

might depend on your propersity, natural market, etc

Lane :

The high net worth market is VERY competitive, has shrunk in the last several years and everybody want them

Lane :

Here's an idea, go after the hnws that own businesses and capture the 401(k)s involved as well

Customer:

ok - to be continued.

Lane :

I just did a yearly education session for a 45 participant 401(k) and the sales guys now love me because I got 43 of 45 people to sign up ... in looking at the numbers, now we won't be top heavy and the sales guys making all the money can really contribute (pre-tax) Now thay all want to work with me individually

Lane :

sounds good

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3630
Experience: Providing Financial & Tax advice since 1986
Lane and 7 other Tax Specialists are ready to help you
Expert:  Lane replied 8 months ago.


Thanks PJ

This is a good place to keep tabs on that community:

http://www.riabiz.com/

Lane

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