raising funds
- Thread starter traderwann
- Start date
Yes, but as soon as you no longer qualify for the exemption, you can only charge performance fees to accredited investors.
Yes. They only pay tax on net gains.
You can certainly do that, but I wouldn't if you want a good long-term relationship with these people. Regardless of the performance, a 50% fee is too high, and your clients are likely to become at least a bit resentful. If you really want to do a tiered fee I would suggest something more like;
Returns less than or equal to S&P 500 - No Fee
Next marginal 10% annual return - 20% fee
Anything above that - 30% fee
But here is where the difficulty comes in. I'm assuming you'll be charging fees more frequently than once a year. Tiered fees really only work well on an annual basis because it is the compounding of returns that allows a manager to reach the higher levels of performance. On the same note, performance is based on NAV and every time you charge a fee the NAV is reduced. So charging fees every month or every quarter is limiting your chances for achieving the higher tiers.
So it really only makes any sense to do a tiered fee schedule when only charging annual fees. This will work for a couple family members if you are just trading as a hobby, but it will not work if you are trading as a business.
In the end, for family I tell them that they must accept my regular fee schedule and the fees are automatically transferred from their account each quarter by IB, just like every other client. I don't want any of the nonsense that comes with delivering an invoice to family members and then pestering them about paying it. Take my advice. Set it up as if you were running a legitimate business and treat them just like you would normal clients.
My accountant said differently. If it's managed accounts, it depends on the trading strategy employed in the account. If the strategy qualified as an active trader then all fees are deductible. If not, then fees are subject to the 2% floor.
In a partnership the rules are also a little different, but I forgot what he had said.
But I haven't gotten a consistent answer on this.
Epic,
Thanks for the advice.
I find the tiered fee schedule troublesome to implement as well, though it makes sense theoretically (better interest alignment).
I could not get IB to do the tiered pricing. However if I bill the clients directly, it is a bit awkward. It also creates tax issue. Clients feel they might not be able to deduct tax if not charged by IB.
I averaged over 50% with 3+ Sharpe for the last 3 years where I trade almost full-time. I have 3 client PM accounts right now with combined balance only half of my own accounts. I did the number and feel that if I only charge 20% or 30% performance fee, it would not be worth the effort.
Happy new year!
njrookie
Thanks for the advice.
I find the tiered fee schedule troublesome to implement as well, though it makes sense theoretically (better interest alignment).
I could not get IB to do the tiered pricing. However if I bill the clients directly, it is a bit awkward. It also creates tax issue. Clients feel they might not be able to deduct tax if not charged by IB.
I averaged over 50% with 3+ Sharpe for the last 3 years where I trade almost full-time. I have 3 client PM accounts right now with combined balance only half of my own accounts. I did the number and feel that if I only charge 20% or 30% performance fee, it would not be worth the effort.
Happy new year!
njrookie
I think you're right. Epic and I both are in the commodity/futures/CFTC world, and things are much simpler from a taxation/fees point of view. Looking at njrookie1's post, he's asking about a FA... so dealing with equities + securities. I still haven't passed my series whatever you need for the securities business, and puzzles like this are exactly why.
I hate to be so unhelpful (or maybe I *am* being helpful)... but my advice is: ask an attorney + accountant. The complexities are mind-boggling.
I agree with you, managing OPM is rarely worth it for small balances. You just have to decide what your long term goals are.
- if it's to make a lot of money off of managing a lot of OPM, then like Epic suggested... I think a simpler (and more "standard") fee structure will make that much more viable.
- if it's to make a lot of money off of small amounts of OPM... don't bother taking OPM at all, at any level of fees. Not worth the stress in your life.
Just for reference, I'm a 0/30.
Heech,
You sound just like my wife
"Too much stress, potentially ruined friendship and family relationships."
I was curious how I will trade with OPM. Also managing OPM sounds like a job, while trading to lots of people is like a hobby.
I am still accumulating capital. Once it reaches 7 figures (hopefully in the next year or two) I probably will return all clients money. This is going to be the first year. It frankly does not matter whether I charge them or not. It is not going to make a difference right now. I just want to build a record in case I start to manage more money down the road.
For managed account, are you worried that they might copy/steal your strategy? For my case, IB allows client to see your positions in real time and they can probably free-ride if they want to.
njrookie
You sound just like my wife
"Too much stress, potentially ruined friendship and family relationships."
I was curious how I will trade with OPM. Also managing OPM sounds like a job, while trading to lots of people is like a hobby.
I am still accumulating capital. Once it reaches 7 figures (hopefully in the next year or two) I probably will return all clients money. This is going to be the first year. It frankly does not matter whether I charge them or not. It is not going to make a difference right now. I just want to build a record in case I start to manage more money down the road.
For managed account, are you worried that they might copy/steal your strategy? For my case, IB allows client to see your positions in real time and they can probably free-ride if they want to.
njrookie
If your long term plans don't involve OPM... I would say, skip the stress!
For me, the greatest pressure doesn't come from losing OPM money... because I haven't really yet. Most of my investors are more patient than I am, as it happens. The aspect I dislike the most is the feeling of constantly being evaluated by the "public", potential investors, competitors, friends, family... Imagine performing your current job, except with your week to week performance up for open examination and public review. ("I think you flipped your burgers too slowly! More mayo!")
Fwiw, I still haven't had great success raising funds, and I'm more than a little seriously thinking about pulling the fund raising and just running my own money. I started off with about $2 mil of my own money, and am up a gross 130% or so over the last 2 years... So I'm personally doing well. I've raised about $1 mm OPM, but the overhead (and stress!) from managing it just doesn't make sense. If I don't make huge head way in the next 6-12 months, definitely going to reconsider.
As far as my strategy being copied... I run a largely automated (95%+) strategy, so that was a huge concern early on. I'm less worried now. The 5% that's non-automated in my case (risk + operational management+ evolution) makes it very difficult for someone to copy my strategy in full, especially when they could just pay me 0/30 to manage it for them.
For me, the greatest pressure doesn't come from losing OPM money... because I haven't really yet. Most of my investors are more patient than I am, as it happens. The aspect I dislike the most is the feeling of constantly being evaluated by the "public", potential investors, competitors, friends, family... Imagine performing your current job, except with your week to week performance up for open examination and public review. ("I think you flipped your burgers too slowly! More mayo!")
Fwiw, I still haven't had great success raising funds, and I'm more than a little seriously thinking about pulling the fund raising and just running my own money. I started off with about $2 mil of my own money, and am up a gross 130% or so over the last 2 years... So I'm personally doing well. I've raised about $1 mm OPM, but the overhead (and stress!) from managing it just doesn't make sense. If I don't make huge head way in the next 6-12 months, definitely going to reconsider.
As far as my strategy being copied... I run a largely automated (95%+) strategy, so that was a huge concern early on. I'm less worried now. The 5% that's non-automated in my case (risk + operational management+ evolution) makes it very difficult for someone to copy my strategy in full, especially when they could just pay me 0/30 to manage it for them.