Opening An Investment Firm: Key Steps To Success

Starting an investment management firm requires a lot of planning and forethought. There are many steps involved, from choosing a business name and structure to registering with the appropriate agencies and the state government. Here are some key considerations for those looking to open an investment management firm:

- Choose a business name that is meaningful, memorable, and reflects the desired brand and focus of the firm.

- Develop a comprehensive business plan that includes a marketing plan, financial projections, and operational strategies.

- Decide on the legal structure of the firm (sole proprietorship, partnership, limited liability company, etc.) and register it with the Secretary of State.

- Secure startup funding if needed through personal savings, loans, investors, or other sources.

- Find a suitable location for the business, considering factors such as the local economy and tax environment.

- Register with the Internal Revenue Service (IRS) and obtain an Employer Identification Number (EIN).

- Open a business bank account and get a business credit card to separate personal and business expenses.

- Obtain the required licenses, permits, and insurance for the firm.

- Develop marketing materials, including a logo, website, and social media presence, to attract and retain customers.

- Identify and hire talented professionals to support back-office and middle-office functions.

- Be prepared to navigate complex regulatory requirements and compliance issues.

- Build a solid digital presence and leverage technology to improve client services and optimize profitability.

Choose a business structure

When it comes to choosing a business structure for your investment management firm, there are several options to consider, each with its own advantages and disadvantages. Here are the most common types of business structures and some key points to keep in mind:

Sole Proprietorship

A sole proprietorship is a legal structure where the owner of the investment company and the business are the same legal entity. This type of structure is simple and inexpensive to set up and operate. However, one of the main disadvantages is that the owner is personally liable for all the debts and obligations of the business.

Partnership

A partnership is an agreement between two or more individuals who want to start an investment company together. It is easy to set up, and the partners share profits and losses. However, partners are jointly liable for business debts, and resolving disagreements can be challenging.

Limited Liability Company (LLC)

An LLC provides limited liability protection to its owners, meaning they are not personally responsible for the company's debts and liabilities. Advantages include management flexibility, pass-through taxation, and limited personal liability. On the other hand, LLCs may not be available in some states, and owners may be subject to self-employment taxes.

C Corporation

A C Corporation is a separate legal entity from its owners, with its own tax ID and the ability to have shareholders. One of the main advantages is that it offers limited liability protection to its owners. However, C Corporations are subject to double taxation, where both the corporation and the shareholders pay taxes on profits.

S Corporation

An S Corporation offers limited liability protection to its owners and allows for pass-through taxation, avoiding double taxation. However, there are limitations on S Corporations, such as the number of shareholders they can have.

When choosing a business structure, it is essential to consider the specific needs and requirements of your investment management firm. Consult with an attorney or legal advisor to determine which structure best suits your company's unique circumstances.

Develop a business plan

Developing a business plan is a critical step in starting an investment management firm. It ensures that you fully understand your market and business strategy, and provides a roadmap to follow. If needed, it can also be presented to funding sources to raise capital for your business. A business plan should include the following:

• Executive Summary: Summarise your entire business plan so readers can quickly understand the key details of your investment firm.
• Company Overview: Provide information about the history of your investment firm and the type of investment company you operate (e.g. mutual fund, hedge fund, closed-end fund, or exchange-traded fund (ETF) investment company).
• Industry Analysis: Conduct market research and document key information about the investment industry, including its size and any trends that are affecting it.
• Customer Analysis: Document your ideal or target customers and their demographics, such as age, location, gender, education, and income.
• Competitive Analysis: Identify your direct and indirect competitors and explain how you will build a competitive advantage.
• Marketing Plan: Address the 4Ps: Product, Price, Promotions, and Place. Determine and document the products/services you will offer, along with their prices. Explain where your business will be located and how this location will help increase sales. Detail the promotional methods you will use to attract customers, such as pay-per-click advertising, public relations, search engine optimisation, and/or social media marketing.
• Operations Plan: Outline the key processes required to run your day-to-day operations and determine your staffing needs. Create a projected growth timeline showing the milestones you hope to achieve in the coming years.
• Management Team: Provide details of your management team members and their qualifications.
• Financial Plan: Outline your startup costs, projected sales and expenses for the next five years, and whether you need to raise funding to launch your business.

To help with developing your business plan, you can download business plan templates online.

Secure funding

Starting an investment management firm requires a lot of funding, and there are several ways to secure it. Here are some options for funding your new venture:

Personal Savings

If you have enough money saved up, you can use your personal savings to fund your investment management firm. This option allows you to retain full ownership and control of your business, but it may not be feasible for everyone, as starting an investment company typically costs between $50,000 and $100,000.

Friends and Family

Another option is to turn to friends and family for financial support. They may be willing to invest in your business, especially if they believe in your vision and have the financial means to contribute. However, mixing business with personal relationships can be tricky, so proceed with caution and ensure everyone involved understands the risks and consequences.

Credit Card Financing

Credit cards can provide a quick and accessible source of funding for your investment management firm. This option may be suitable if you need to cover initial setup costs or make small purchases. However, it's important to carefully manage your credit card debt to avoid high-interest charges and maintain a good credit score.

Bank Loans

Approaching banks or other financial institutions for a loan is another common way to secure funding. To increase your chances of approval, prepare a detailed business plan and financial projections. The bank will want to see that you have a clear understanding of your business and its potential for success. Keep in mind that you will likely need to provide collateral and that the interest rates and repayment terms may vary depending on the lender.

Crowdfunding

Crowdfunding has become an increasingly popular way to raise funds for new ventures. It involves reaching out to a large number of people, usually through online platforms, and asking them to contribute to your business idea. In return, you may offer them rewards, equity in your company, or a share of future profits. Crowdfunding can be a great way to generate interest in your investment management firm and build a community of supporters, but it may not be suitable for everyone, as it can be time-consuming and competitive.

Angel Investors

Angel investors are individuals who provide funding for early-stage businesses, particularly those with high growth potential. They typically invest their own money and offer mentorship or advice along with financial support. To attract angel investors, you will need a strong business plan, a unique value proposition, and a clear understanding of your target market. Keep in mind that angel investors usually expect a return on their investment, so be prepared to negotiate the terms of their involvement.

Securing funding for your investment management firm is a critical step in turning your vision into a reality. Each funding option has its own advantages and considerations, so carefully evaluate which ones align with your needs and goals.

Register with the government

Registering with the government is a critical step in starting an investment firm. The specific requirements vary depending on your jurisdiction, so it is essential to consult with a lawyer to identify all the necessary steps. Here are the key points to consider when registering with the government:

Understand the Regulatory Landscape:

Before starting the registration process, gain a comprehensive understanding of the regulatory environment in your jurisdiction. This includes familiarising yourself with the relevant laws, regulations, and government agencies overseeing the investment industry. In the United States, for example, investment firms typically need to register with both state and federal authorities.

Identify the Required Licenses and Registrations:

Investment firms typically need to obtain various licenses and registrations to operate legally. These requirements may differ based on the specific services you plan to offer and the jurisdiction in which you operate. Common registrations and licenses include:

• Registering with the Securities and Exchange Commission (SEC)
• Registering with the Investment Advisor Registration Depository (IARD)
• Obtaining a securities license from the state where you plan to operate
• Obtaining a broker-dealer license, depending on the products offered
• Registering with a self-regulatory organisation (SRO)

Comply with State-Specific Requirements:

Each state may have its own unique set of requirements for registering an investment firm. Consult with your state's securities regulator to understand the specific steps, forms, and fees associated with registration. Some states may also have basic requirements for the minimum amount of capital needed to start a securities company.

Seek Legal Counsel:

Engaging the services of a lawyer is highly recommended when registering an investment firm. A lawyer can help you navigate the complex legal and regulatory landscape, ensuring that you meet all the necessary requirements. They can also assist in reviewing and preparing the necessary documentation, such as articles of incorporation, operating agreements, and registration forms.

Prepare and Submit Registration Forms:

The registration process typically involves completing and submitting various forms to the relevant government agencies. These forms may include applications for registration, articles of incorporation, operating agreements, and other supporting documentation. Ensure that you carefully review the instructions provided by the relevant government agencies and submit all the required information and supporting documents.

Obtain Necessary Licenses and Permits:

In addition to registering with the relevant government agencies, investment firms may also need to obtain specific licenses and permits to operate legally. These could include licenses related to the products or services offered, such as a broker-dealer license, and permits related to the physical location of your business, such as zoning permits or occupancy permits.

Understand Ongoing Compliance Requirements:

Registering your investment firm is often just the first step. It is crucial to understand the ongoing compliance requirements that apply to your business. These may include periodic reporting, maintaining certain financial ratios, and adhering to specific record-keeping practices. Ensure that you have processes in place to stay compliant with all relevant regulations.

By carefully following the steps outlined above and seeking legal counsel, you can ensure that your investment firm is properly registered with the government, allowing you to operate within the bounds of the law and providing peace of mind as you build and grow your business.

Hire professionals

Hiring the right professionals is a critical step in setting up an investment management firm. It is a complex and time-consuming process that involves extensive legal, regulatory, and compliance work. While you may be familiar with these areas, establishing them often requires specialist assistance.

Firstly, you will need a solid legal footing. This means hiring a lawyer who can advise on the rules and etiquette when leaving your current employer, and any contractual obligations that may prevent you from working for a competing firm. They can also help you establish the best business structure for your firm and draft the necessary paperwork, such as articles of incorporation and any operating agreements.

You should also consider investing in professional help when it comes to designing a professional-looking website, business cards, and other marketing materials. Contractors can be useful here, helping you to keep costs low without sacrificing quality. For example, you could hire contractors to handle simple tasks like bookkeeping, accounting, or secretarial duties.

Another key hire is a solid chief financial officer and chief compliance officer. These C-level employees will give you the bandwidth to focus on building and managing your portfolio rather than the more mundane necessities of running a firm.

Finally, you may want to enlist the help of companies that have been set up specifically to aid financial advisors in setting up their own practices. For instance, Tru Independence handles everything from registered investor advisor/broker-dealer registration to office space selection and design. In exchange, these companies may charge a consulting fee, a percentage of assets, or even take an equity stake in your new firm.

Frequently asked questions