Last in the series. After this in the workshop was a presentation about tech tools and social media by John Fleming, CEO of Outcome Labs, and then a grab-bag sort of wrap-up that we ended up doing over dinner later that night at Morada Bay. No slides there, just beer and yellowtail.
I think the most relevant messages I tried to get across during this section were as follows:
1 – Being a good portfolio manager is not the same as running a company that is good at portfolio management.
2 – The economics of running a spoke fund can be very compelling.
3 – The internet gives you an advantage over potential competitors – mutual fund companies, hedge funds and even brokers chasing the same clients. More specifically, you can acquire customers at a cost very near zero.
4 – Certain technological tools can also bump your productivity up quite a bit. That’s important because it allows you to keep your focus where it should be – on the fund.
Also – nothing focuses the mind more on the importance of cash flow than running a small business. To paraphrase Warren Buffett, being a small-businessman makes you a better investor, and vice versa.
Other notes on the below:
That Sales Funnel slide is one of the most important of the day. Simple concept, and probably a bit too clinical, but to have a systematic way to attract the right kind of people and have them become investors is crucial. The “10 Things to Expect” slide was basically a rehash of this blog post. And while I emphasize the online channel in discussing marketing here, it cannot replace good old fashioned gripping-and-grinning. That should be a given. It just doesn’t scale. The right mix, the right spend, timelines and everything else that goes into marketing is still very much a work in progress for me, too, so as usual, take any and all of this with as many grains of salt as you see fit.
And yeah, I would much rather not worry about marketing, ads, sales, branding, yadda yadda…but the head of my company absolutely should keep marketing a priority. And, well, that guy is me.
Here again is the link to Part 1, and a link to Part 2.
The slides below cover prepping for launch and then the actual launch of a spoke fund. The prepping for launch slides were similar to this older post on Critical Path Items. The Launch series focuses just on specifics on the FOLIOfn platform, and assumes a handful of things that may not be obvious up front – namely, that you’re going to rely on window trades to make your initial purchases. You don’t have to, and may not want to, as per these comments on a previous post. I like using window trades for the reasons outlined in that same comment thread – i.e. they are free. This brings my inner cheapskate to tears.
The screenshots used to demo the steps in the FOLIOfn back-end also were taken from one of two advisory accounts I have at FOLIOfn (different billing plans), and were from a mock portfolio that just contained three stocks. Once you understand the core process, which is pretty straightforward, launching a fund with more stocks is simple.
Also, the topics on the “Things to Note” slide aren’t really done justice here. Each is probably worthy of a separate post of its own.
There are a handful of tools I’ve developed on my own, too, to fill in the gaps in FOLIOfn’s own system. The “Prepping to Invest Client $” slide (number 25 here) is a simplified version of one such tool – a basic spreadsheet – that I use to enable me to make sure I’m investing clients money in the right proportions. More specifically…
When initially syncing a new client account to the core model, you should manually adjust the weights of individual positions to be bought in order to meet your desired target weights. That’s because the default in FOLIOfn’s system when syncing client-by-client is to buy shares according to current market weights, not the most recent weights you’ve dialed in to the portfolio. If it’s been a few months, the differences can be big – and then your clients are buying more of those shares that have gone up the most.
The ability to tweak that initial buy-in is actually another advantage of spoke funds over mutual funds, as I get into more in this post on Q&A and the Ask the Geek section of this shareholder letter.
In any case, you only need to make those weighting tweaks when syncing a new client the first time. Once they’re locked in, any changes you make to the core model automatically brings everyone in line to the most recent weights you dial in. So the bottom line is that it’s not a big deal as long as you include that step in your own onboarding processes.
And finally, I’ve recently been looking at new ways to streamline my own client onboarding process, too. So while EchoSign has been great to me for the last few years (more about them later), I may soon tweak some things beyond what is shown here. And you all will be the first to know…
More slides from my recent workshop. Here was Part I.
This section could be subtitled “Barely Scratching the Surface.” I tried to hit the three or four most critical issues to think about here, so there were only a handful of slides we reviewed. As it was, we spent a considerable amount of time walking through each slide and discussing the critical points in more detail. If the workshop were a week long course, a discussion about the economics of spoke funds could probably be a day by itself.
In the “Scalability” slide, “The Buffett Cap” refers to a cap on my own salary. I haven’t paid myself anything in salary to date, but I intend to before too long, obviously, and as I currently conceive of my own business, that will eventually max out at $100K a year…if for no other reason then that is what Warren Buffett takes home. I’d rather not tempt any lightning bolts by presuming I deserve more. Highly rigorous, I know.
Also, I am a cheapskate. I can be fat, dumb and happy on considerably less than $100K a year as long as I know the rest of my net worth continues to work hard for me in Tarpon. Too much more in salary would mean I’d be expected to buy a round for everyone, everywhere, every time in the Keys. So, you know, thank goodness nobody reads this blog. Plus, anything I earned beyond what I really needed would go right back into Tarpon, anyway.
In any case, cash in the business left over after hitting The Buffet Cap could go towards more virtual assistants, a full time employee and/or running the business in general. And that $20M figure in terms of assets under management is my bogey. Nothing to say it couldn’t be much higher, but that’s what I’ve been planning for since day one. As one of the guys pointed out at the workshop, my margins might be better at $30M in assets, mainly for for compliance/registration reasons, and I agreed, but I’ll get into that at another time here.
That whole not-taking-any-salary-yet thing is not nearly as ascetic as it might otherwise sound. That’s how 99% of all start-ups work, after all, a fact that often seems to be forgotten when it comes to managing money. And while I haven’t brought home a pay check to date, my business is otherwise funding itself now and my net worth is growing just fine in Tarpon – both of which mean I’m happy to eat palm fronds every day for lunch.
But to be clear, if you want to start paying yourself on day one, or bring home $500k a year in salary, go nuts. Just factor that in to the enclosed slides as you see fit.
The issue of whether or not to subsidize new accounts is a big one. And by subsidizing I mean either waiving my own fees and/or partially or fully reimbursing fees the custodian charges in order to keep my investors’ expense ratios as low as advertised. As you can see in the slides, it takes a little figuring to service small accounts in a way that keeps those investors’ fees under control – due to minimum annual fees the custodian charges each account. I chose to subsidize when I first launched Tarpon, and I recommend it for new spoke fund managers, too, unless you’re already coming to the game with a stable of active investor accounts. The reasons I subsidized were (1) I was launching a new firm and did not have an existing base of investors, (2) not all my friends and family could meet my official minimum and (3) there is a law in investment management that “assets attract assets.” Number three is probably one of the most important tips to remember in terms of growing the business that first year.
I also estimated that it cost me about $200 to acquire a new investor – a very rough early guesstimate but still a useful benchmark today. I decided that if the subsidy I paid out was less than that, and if I felt I could make the investor happy enough to refer new investors my way (without me having to beg), then subsidizing was a no-brainer. As it worked out, each account I subsidized more than made up for the cost of that subsidy through new client referrals by the end of that first year. Plus, I never had to ask. I’ll talk more about acquiring investors a bit later.
And as I pointed out in the workshop, the few slides below about a suggested budget don’t reflect the actual costs of my own business to date. Some lessons are learned the hard way, I suppose, particularly when it comes to spending money on marketing and advertising. I also spent a ton of money (at least, a ton to me) on legal fees related to compliance. Since the spoke fund concept was pretty new, I was paranoid about my own compliance efforts as well as what was I could and could not put in our ads, both in the papers and online. But assuming you can benefit from my own mistakes, and that you don’t have to pay the lawyers those extra fees, the suggested costs shown should be a pretty good benchmark – assuming you run things light, like a traditional start-up. If you feel you need the ocean-view office and mahogany conference table right out of the gate, you’ll want to adjust my numbers there, too.
Please ask any questions in the Comments section of this post. Next up: prepping for launch.
$TNDM This is the comp the mkt worries about? Peerless can't seem to raise VC $, more discounts & use credit lines...? http://bit.ly/bQo0Fd 2 days ago
