The Reality of Starting a Solo RIA
Lessons on overhead, the "marketing hat," and why I’m glad I took the leap.
Since launching KNA Capital two years ago, I’ve had dozens of conversations with people thinking about starting their own firm.
As much as I enjoy meeting aspiring managers, I’m regularly asked the same questions and I find myself giving the same answers.
In the interest of scale and transparency, here are the lessons I wish I had fully understood before I took the leap.
It’s never been easier to set up a firm. You can launch a firm today for as little as a few thousand dollars and some paperwork for state registration, ADV filings, etc. Finding an insurer to underwrite my cybersecurity and errors and omissions (E&O) policies was surprisingly challenging. It’s best to work with an independent insurance agent who specializes in working with asset managers. I use Schwab as my custodian and they have been easy to work with and provide the institutional-grade security my clients expect.
This also means competition has never been more intense. Competition is increasing from both sides of the spectrum. The number of new RIAs continues to grow each year. Meanwhile, large RIAs are consolidating, becoming one-stop shops for high-net worth individuals and families. How will your new firm stand apart?
Know exactly what you want to do before you get started. Once you start filing paperwork it is difficult and expensive - especially if you’re working with attorneys - to make changes. I learned this the hard way. You should know exactly what your firm structure will be, your fee structure, whether you’ll charge fees in advance or arrears, and every other detail before you put ink to paper.
Your overhead is what you decide it will be. Before I launched KNA, I regularly heard that I needed to budget at least $50,000 in overhead for research materials, software, travel, etc. And that’s before any income I might take for myself. Yes, if you want office space, a Bloomberg, etc. you’ll easily get into the high five-figures, but as for me and my firm, the overhead is a fraction of what I’d heard. I intentionally keep overhead low to ensure the firm’s long-term stability. I work out of the house, I only travel when I think there’s a high ROI, and have found that I only need a few research tools for current needs. If you’re resourceful, you can accomplish a lot with a little. You can’t get around things like filing fees, insurance, etc. but with everything else you can be creative. Finally, being based in the Midwest is an advantage from a cost perspective.
To be an asset manager, you need assets to manage. If you didn’t work with clients at your previous firm, building a client base from a cold start is challenging. If you’re a natural introvert like me (and most other investors), putting on a marketing hat can be uncomfortable. Finding aligned clients may require you to do things outside your comfort zone like public speaking, hobnobbing at events, or even…golf. Investment skill is necessary, and there’s a certain glamour among our peer set in saying we don’t do marketing, but distribution is what determines whether you have a business at all.
Market before you launch. As with most products, anything that’s “new” has buzz. Take advantage of your pre-revenue phase by reaching out to potential clients prior to launch. At the very least, you can drive some feedback before the product hits the market.
Your investment time horizon has a high correlation to the time it takes to build your asset base. If you are a trader looking to maximize short-term returns, evidence of your skill becomes apparent fairly quickly. If you’re good, assets will also find you quickly. On the other hand, if you’re a long-term investor like I am and measuring yourself over rolling 3- and 5-year periods, you should expect it to take 3 to 5 years to make a name for yourself and organically drive inbound interest.
Having a second source of income is useful. Related to the previous point, you have to survive long enough to have a chance of success. For me, I teach and run this Substack. All three of my projects are related and reinforce each other. However you fund the early years - savings, a partner, or side income - you need a runway to get you to the other side.
Don’t expect too much from your Substack. I get a lot of questions about using Substack for secondary income and inbound marketing for KNA Capital. Don’t expect too much from either. Substack can help, but it’s not a client acquisition engine. Newsletter subscribers are more likely to be other professional investors or DIYers than potential clients of your RIA. RIA compliance also limits what you can say in the newsletter, which can dampen sales growth. Finally, Substack has become insanely competitive. You have to differentiate somehow and you have to understand that what makes a successful newsletter does not make a successful RIA.
At least half of your time will be spent on non-investment related tasks. The majority of my career was spent in research and portfolio management roles where I had little exposure to back office processes, trading, and accounting. When you’re running a solo RIA, that’s all on you. No, it’s not fun learning how to run Docusign or entering debits and credits into your accounting software, but it’s a necessary part of running the business. While these processes may not be “fun,” they provide you with a deeper appreciation for how businesses are run, which can carry over into your investing.
Set up good processes from the start. One of the nice things about being state-registered - at least in Ohio - is that the examiners are friendly and helpful. While my current client list might be manageable on a spreadsheet, my examiner gave me a good bit of advice to get a CRM before I really need one. I’ve been using one for about six months now, and it’s already proven useful as I add new clients and have more conversations with existing clients.
It’s a tremendous privilege to manage other people’s money. While I have ambitions for the firm, the first and foremost responsibility is to be a steward of each client’s capital. For private clients, you are likely managing a meaningful portion of their hard-earned capital that they depend on for retirement or other goals. For institutions, you are helping them achieve their organization’s goals, which can have meaningful impacts on society and the environment. This is a heavy responsibility and should not be taken lightly. Fostering these relationships is a reward in itself, and I’m deeply grateful for the trust my clients place in me.
I’m glad I did it. Starting my own firm had long been a dream of mine, but having lucrative full-time employment made it difficult to voluntarily take the leap of faith. The involuntary push I got clarified the decision. To be clear, the transition has not been easy on me or my family and has required sacrifices. (That’s why I named my firm after my wife and kids.) Anyone with dependents should understand that part of it. But it’s gotten better each year. I’ve never been busier, but I’ve never enjoyed the work as much as I do now. I would have regretted not doing it.
For many thoughtful investors, starting a firm is a natural aspiration. In reality, it has its highs and lows. Being an operator as well as an investor requires different layers of emotions, time management, and discipline. The more you are aware of these challenges before you take the leap, the better prepared you’ll be to take them head-on and build a successful firm.
I hope you found this useful.
Stay patient, stay focused.
Todd
This post is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any interests in any investment vehicle managed by KNA Capital Management.
Todd Wenning is the President & CIO of KNA Capital Management, LLC, an Ohio-registered investment advisor that manages a concentrated equity strategy and provides other investment-related services.
At the time of publication, the author, his immediate family, and/or KNA Capital Management, LLC or its clients do not have positions in any company mentioned.
Please see important disclaimers.
Yup, starting out you get to be maitre d', chef, bottle washer; not always fun, but as you note, you inevitably gain from the experience.
Most importantly, always appreciate those early clients; if you take really good care of them, at least a few will transform into an amazing salesforce--and who are not on your payroll!
Appreciate your perspective as always! Have you found it hard to manage individual accounts will also keeping a coherent portfolio thesis for your Substack/client letters? I'm in this pickle in a non-professional capacity.