ML might force me to start an RIA

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Alias's picture
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Joined: 2009-01-25

I am a ML FA who recently graduated the training program.  Since then, my numbers have gone down because I moved a significant portion of my MLPA assets to cash (before October) and I have not brought in much new business.  With all of the changes going on at ML/BoA, I suspect that I might find myself in the same predicament as the current POA/PMDers.  In case I am given two weeks to move on, I would like to better understand my options and the potential implications to my U-4, licenses and designations.  I have my 7, 66, CFP® and CRPC®.At this time, I think my most likely option would be to go off on my own and start an RIA firm.  Are there any suggested resources (other than the search button, Fidelity and Schwab) to dig deeper into the RIA option?If ML gives me two weeks to find a new job, how should I time things?  Should I leave ML before the two weeks and start the RIA or should I let ML terminate me then start the RIA?  I’m concerned about what is best for my U-4 and what is best for being able to approach my old clients (i.e. protocol).  I don’t currently plan on having any other RRs work for the RIA firm, but I’m thinking that might be short-sighted of me.  With many talented, licensed and trained people losing their jobs, maybe I should have a few other RRs under my firm’s name.  What precautions should I take for those who either involuntarily leave their firm or voluntarily leave their firm?What other potential issues and pitfalls are there that I should be concerned with?  I have some bankroll and an office space.  I might even have a small (individual) private equity firm who is interested in being an angel investor or having me found a wealth management division for their firm.If I am not given my walking papers, I plan on staying with ML and toughing this merger out.  Even if I didn’t plan on toughing it out, wouldn’t I have problems with protocol if I left to start an RIA?Alias (not my real name)

Hank Moody's picture
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Joined: 2008-11-10

Your problem is that you are a cfp. Cfp's tend to not do well in the real world, away from discussion forums. 

Alias's picture
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Hank Moody wrote:Your problem is that you are a cfp. Cfp's tend to not do well in the real world, away from discussion forums. 
Thank you for the advice putsy...very helpful!Should I just not renew my CFP so that I can have a chance in the real world?  Is the problem that I'm a fiduciary to my clients and that I always have to act in their best interest?Alias

Squash1's picture
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Alias wrote: Hank Moody wrote:Your problem is that you are a cfp. Cfp's tend to not do well in the real world, away from discussion forums.  Thank you for the advice putsy...very helpful!Should I just not renew my CFP so that I can have a chance in the real world?  Is the problem that I'm a fiduciary to my clients and that I always have to act in their best interest?Alias
 
Yeah that's it...self righteous CFP...

Hank Moody's picture
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Alias wrote:
Hank Moody wrote:Your problem is that you are a cfp. Cfp's tend to not do well in the real world, away from discussion forums. 
Thank you for the advice putsy...very helpful!Should I just not renew my CFP so that I can have a chance in the real world?  Is the problem that I'm a fiduciary to my clients and that I always have to act in their best interest?AliasDitch the cfp mentality and become a salesman. Figure out what people want to buy and sell it to them. Start doing that and you won't get fired anymore for not being able to produce.

Alias's picture
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Joined: 2009-01-25

Hank Moody wrote: 
Ditch the cfp mentality and become a salesman. Figure out what people want to buy and sell it to them. Start doing that and you won't get fired anymore for not being able to produce. Fair enough point.  Do you have any insight to any of my questions about starting an RIA firm?Alias

HymanRoth's picture
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Before you get completely married to the idea of setting up your own RIA, you might want to at least take a good hard look at the various B/D's who will allow you to collect fees as an IAR and also handle traditional commission business and insurance business as well.  That way you can offer more options to clients, and there are more potential sources of revenue for you too.  Operating as a rep under their corporate RIA will also mean quite a bit less work to get things set up so you can focus on getting your clients transferred over and up and running.You might also want to consider focusing on the self-clearing indy b/d's, as that would allow you to hold 'most' assets in the same place rather than dealing with seperate entities for broker/dealer and clearing.  That will be most similar to the administrative structure you deal with now.  RayJay and LPL definitely fit that description, and I think Stifel also has an indy channel b/d...Century might be the name?

anonymous's picture
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Joined: 2005-09-29

"Is the problem that I'm a fiduciary to my clients and that I always have to act in their best interest?"
Do you actually believe that holding your CFP makes things different?

Alias's picture
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Joined: 2009-01-25

Heck no! Read my original post and not Hank's response. I'm looking for information. I don't think any of you care about my designations.

Hank Moody's picture
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Alias wrote:Heck no! Read my original post and not Hank's response. I'm looking for information. I don't think any of you care about my designations. I'm sorry that you found it necessary to be a cfp to make yourself act in the client's best interest. The rest of us do it because it is part of our character.

Northfield's picture
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Joined: 2007-04-10

Wow. Alias is asking for some career advice guys, not whether you feel his designation makes him superioir to you. Obviously you do and are not happy about it.
Alias... you are likely safe. Having graduated from POA you will be spared the initial cut. If you can gut it our you're probably better off waiting before you consider a move.
 
If you feel you must leave or are forced to leave, consider joining an existing independpent practice and continue building your practice.
 
I don't think you have the critical mass to go independent on your own right now.
 
Full disclosure....I am former wire BOM, now independent. Best of luck this week,

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Hank Moody wrote:
Alias wrote:Heck no! Read my original post and not Hank's response. I'm looking for information. I don't think any of you care about my designations. I'm sorry that you found it necessary to be a cfp to make yourself act in the client's best interest. The rest of us do it because it is part of our character.

...gotta go find a paper towel to wipe up the coke I just spewed all over my computer monitor. Good one Hank.

Sam Houston's picture
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Joined: 2008-12-01

Coke is probably easier to clean up than what Hank spews on his keyboard.

Squash1's picture
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Joined: 2008-11-19

Northfield will clean it up... HEY CFPs are best at everything.. including failing out...

Sam Houston's picture
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Joined: 2008-12-01

You spew thinking about my mother?  I have seen a picture of your wife so I understand.

Morphius's picture
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Joined: 2007-07-21

Alias,What (approximately) is your AUM & current production?  How long have most of your clients been your clients?  What is your breakdown of fees vs. commissions?  Is your business mostly MFs, managed money, or what?  What support staff would you need? Finally, when you ask for information other than the search button and Schwab/Fidelity, does that mean you have already made full use of those resources?

Sam Houston's picture
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I have literally seen a picture of your wife so I understand.  How did the kid happen?  Drunk?

Alias's picture
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Morphius wrote:What (approximately) is your AUM & current production?  How long have most of your clients been your clients?  What is your breakdown of fees vs. commissions?  Is your business mostly MFs, managed money, or what?  What support staff would you need? I have 8MM annuitized with a velocity of 115 bps.  I have almost no commissioned based business but I do have about $5MM of non-producing assets that might eventually generate a transaction charge or move to annuititzed.  75% of my business is individual stocks and bonds.  The rest is MFs (closed and open) and index funds.  I also do quite a bit of options, mostly covered calls but some spreads and collars.My biggest clients have been with me for two years and have already told me that they are a customer of "alias" and not a customer of ML.I might not need new support staff.  The private equity person that I mentioned in my original post would share his support staff and office space with me.  I also have a office in my home that is more than suitable for client meetings.Morphius wrote:Finally, when you ask for information other than the search button and Schwab/Fidelity, does that mean you have already made full use of those resources?
I've used all three of the resources but I need to revisit them to build upon the knowledge that I've gained since my original pass.  My biggest questions are regarding my U4 and protocol.  It would stink to leave and then not be able to contact my clients.Alias

Morphius's picture
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I just have time for a quick response now, so this might be a bit rough.While you need to plan your exit carefully, you should not be overly concerned about either your U4 or protocol if you go RIA.   Assuming you exit cleanly, there should be little likelihood that your current b/d tries to ding you there, and frankly even if they do, that won't matter much if you go straight RIA (and drop your FINRA licenses).  All you'll need for RIA in most states is your S 65/66.With regards to protocol, there are a couple ways to handle your exit to minimize the chances of encountering any significant problems from your current b/d, regardless of whether the protocol applies.  If you get legal help with the set up of the RIA and exit, which you should, you should be fine, especailly at your asset levels.  In the final analysis, you need to be careful but as long as your clients want to stay with you, you'll be fine.  This is still a free country.Just be very careful what you say to any clients about actually leaving.  To the extend you say anything, make sure it is hypothetical, as in "if I should ever decide that the best way to take care of you and my other clients would involve a change in firms, I would not hesitate to do that, even though I would not be able to give you any advance notice of that because of legal concerns."  You owe a legal duty of loyalty to your current firm as long as you are employed.Also, it would be great if you could reduce expenses by sharing office space/support staff with someone else, but I would really caution you against agreeing to take on an equity partner unless you can't survive financially otherwise, and that shouldn't be the case if you control rent and staffing costs, which are typically the two largest costs.  Don't give away equity if you don't have to.Finally, make sure you are very clear on the distinction between what many brokers call "annuitized" assets (such as C shares) versus those assets on which clients are already accustomed to paying an actual advisory fee.  It may feel the same to you, but they are not the same in terms of an easy transfer and start up.  Especially with your AUM level, you can survive but you won't have much room for any error.

CDO Squared's picture
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Joined: 2009-01-20

want the best advice EVER in the business
ever?

dont read the paper
dont go to message boards
dont worry
dont project

JUST GET ON THE MF TELEPHONE AND CALL STRANGERS.......

aint fun

its the only thing that works in this biz

Alias's picture
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Joined: 2009-01-25

Morphius wrote:I just have time for a quick response now, so this might be a bit rough.
Thank you for the great response.  I only have one client with c-shares and I don't even get paid on her at ML (<$100k now).  All the rest is MLPA fee-based (used to be MLUA).As of now, ML has not made the decision for me.  I'll keep investigating my options and make a move if forced or if I am sure that it is the best time to do.Alias

Morphius's picture
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Alias wrote:
As of now, ML has not made the decision for me.  I'll keep investigating my options and make a move if forced or if I am sure that it is the best time to do.Just realize that if you simply wait for ML to make the decision for you, you will not have the time at that point to start an RIA so will have eliminated that as a practical option.   Besides the planning to know what you want to do and how, there is the time it takes to establish the legal entity and register with your state, not to mention making arrangements with a custodian, to name a few.My only point is you cannot simply wait for a b/d to can you and still hope to be able to react quickly enough to then start an RIA.  That option will take too long to retain the lion's share of your clients.  So if you think that may be an option you want to leave open, you would need to continue to act and prepare now.  It's clear from the way ML handled the last cuts that you won't have much advance warning, beyond the obvious fact that they are cutting FAs more aggressively.  Don't wait for your house to be on fire before gathering water.

Morphius's picture
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CDO Squared wrote:dont go to message boards
I guess that is one of those 'do as I say, not as I do' things?

HymanRoth's picture
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Morphius wrote:
Alias wrote:
As of now, ML has not made the decision for me.  I'll keep investigating my options and make a move if forced or if I am sure that it is the best time to do.Just realize that if you simply wait for ML to make the decision for you, you will not have the time at that point to start an RIA so will have eliminated that as a practical option.   Besides the planning to know what you want to do and how, there is the time it takes to establish the legal entity and register with your state, not to mention making arrangements with a custodian, to name a few.My only point is you cannot simply wait for a b/d to can you and still hope to be able to react quickly enough to then start an RIA.  That option will take too long to retain the lion's share of your clients.  So if you think that may be an option you want to leave open, you would need to continue to act and prepare now.  It's clear from the way ML handled the last cuts that you won't have much advance warning, beyond the obvious fact that they are cutting FAs more aggressively.  Don't wait for your house to be on fire before gathering water.+1 on the above.I'll reiterate my suggestion that you investigate the avenue of indy b/d's that will allow you to come in 'turnkey' under their corporate RIA and will also facilitate traditional commission business and insurance business.  This will be something you can set up more quickly, and also offers more ways to generate revenue...this could be important since you have a somewhat smaller revenue base.

Akkula's picture
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Joined: 2008-02-17

If you work at ML, you are not a million dollar producer, and you don't have a very firm "plan B," that is not very smart.   

MinimumVariance's picture
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Joined: 2008-08-20

The reason you have a CFP is to impress your colleagues (well, and maybe know something about the crap you sell), so the one way that psychologically immature people react is to ridicule what they don't have --- pretty basic human behaviour -- though its really a display of repressed jelousy.
 
But as to your real question about starting an RIA -- if you start right now you'll be able to -- maybe -- open for business in about 9 months. As you have virtually no assets to speack of you will find it difficult to find a BD, or liability insurance. Good luck.

Morphius's picture
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MinimumVariance wrote:But as to your real question about starting an RIA -- if you start right now you'll be able to -- maybe -- open for business in about 9 months. As you have virtually no assets to speack of you will find it difficult to find a BD, or liability insurance. Good luck.
Nine months to open an RIA?!    Maybe if you're a snail.  It can take that long if you want it to or if you don't know what you are doing, but it is very possible to do it in a fraction of that time.  Depending on how long it takes to get the RIA registration actually approved, 60-90 days is very realistic, and shorter is certainly do-able.
 
And if he is going straight RIA, he won't need to find a b/d.
 
 

Captain's picture
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MinimumVariance wrote: But as to your real question about starting an RIA -- if you start right now you'll be able to -- maybe -- open for business in about 9 months.

You have no clue what you are talking about.

C

Swordoftruth's picture
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A lot of people waiting to get their heads chopped off. The circumstances are all different but it's a similar tune.

Alias's picture
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Anyone else considering this option should read over:http://www.schwabinstitutional.com/public/html/silegalwhitepaper.htmlIs there a way to get a copy of my ML employment contract without causing suspicion?If I were to go the RIA  route, wouldn't ML find out or need to be notified when I actually start the process of setting up an RIA?  Would an option be to get the process started under another person's name (wife or family member) and then change it over to my name?  If that is a possibility, how far could they get without having the 66?Alias

Captain's picture
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I can't speak to your employment contract issues.

But, on your other questions - yes, there is a way to create an RIA without having to inform ML. Ordinarily, yes, you would have to notify them, since you would be forming an outside business and would have to disclose this fact. But if you work closely with your legal counsel, they MAY have the ability to create, apply for, and own your RIA prior to you assuming the ownership of the RIA immediately following your resignation.

Once we resigned from our former firm, we accepted the ownership of our new RIA. We did NOT accept ownership prior to our resignation. This was arranged with our attorney, and I would strongly suggest that you work through legal counsel on this matter. I don't think it's a good idea to involve your family in this matter. The SEC, however, has issued some comments that they are cracking down on this behavior... not sure, but I've heard some rumblings.

We worked with Hamburger Law firm on this issue - http://www.marketcounsel.com/svc-new-ria.html

One thing that I've heard recently, is that some RIAs are a part of the 'protocol'. It might be a worthwhile question with your legal counsel concerning having your future RIA become a part of the protocol prior to your resignation. This might help your situation.

C

Morphius's picture
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Alias wrote: Anyone else considering this option should read over:http://www.schwabinstitutional.com/public/html/silegalwhitepaper.html
Now you are beginning to understand why I said spend some time checking out the Schwab & Fidelity institutional web sites - not because I am tired of writing the same info over and over again (although there IS that) but because there is a lot of very useful information there, more than anyone can share here!
Alias wrote:Is there a way to get a copy of my ML employment contract without causing suspicion?
Yes. Look at the copy in your home file that you kept from the beginning, since anyone who signs important employment agreements surely ought to be bright enough to keep a copy of what they signed, right?

OK, if you are among those many who for whatever reason did NOT keep a copy, you should kick yourself in the ass and recognize that your options for getting a copy without raising suspicion are limited. You can come up with excuses to ask for a copy, but it will almost certainly raise a big red flag and your BOM will be advised. Are there any other FAs who joined ML about the same time as you did? Perhaps you can get a copy from them. Not perfect but it might allow an attorney to have a clue as to what agreement you might have signed.
Alias wrote:If I were to go the RIA  route, wouldn't ML find out or need to be notified when I actually start the process of setting up an RIA?  Would an option be to get the process started under another person's name (wife or family member) and then change it over to my name?  If that is a possibility, how far could they get without having the 66?Alias
You have the right idea. The database of those registering for an RIA, and even those incorporating with a state, are public and B/Ds do regularly check those so you do NOT want your name on the original documents. You are correct that the basic strategy is to have everything registered in another's name (ideally someone who does not share your last name, and may even be your attorney) and then simply transferred into your name the day you leave, once you have formally resigned. Legally, you need to avoid owning and/or operating an OBA while still employed at your former B/D.

This is variously referred to as an 'undercover' strategy, or similar name. Not hard, although there is some legal work/fees involved since you effectively need to double file. The details vary on whether you would be registering with your state (under $25 MM AUM within 90 days of approval)or with the SEC (over $30 MM, with $25-30 MM being optional state or SEC).

The point is paying for proper legal help in navigating the path is money well spent, as the particulars for a given situation will vary depending on your circumstances. Just know you'll want to use and undercover strategy if you're leaving a wirehouse.

Northfield's picture
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Captain wrote:One thing that I've heard recently, is that some RIAs are a part of the 'protocol'. It might be a worthwhile question with your legal counsel concerning having your future RIA become a part of the protocol prior to your resignation. This might help your situation. C
 
Although I do not have specific experience, I have heard the same. Ex-wirehouse FAs going independent are joining the protocol as part of their legal start up. Apparently, joining the protocol is fairly simple. Good question to ask of your legal counsel.

Sportsfreakbob's picture
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Joined: 2008-08-24

Why wouldnt all the independent B/D's  not join the protocol if its simple. I spoke iwth a large well known indie b/d last week and asked the question. Was told they are not part of the protocol. Doesnt this present all kinds of potential issues?

Captain's picture
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Brand new article... worth reading.

From my understanding, some firms didn't feel the need to sign it. It used to be an exclusive pact between just a few firms... If your firm was losing more advisors than you were gaining, it limited your right to damages.

This is a good Q and A session that answers many good questions - brand new... just read it this evening.

http://www.investmentadvisor.com/Issues/2009/February%202009/Pages/Experts-Corner.aspx

C

Alias's picture
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Joined: 2009-01-25

Thank you for all of the information.  So far joining an established RIA seems to make more sense...at least for the next year or so.Some places claim 90% payout but from what I've heard they nickle and dime you down to much lower.  What is a more realistic payout (not taking in account office space or support staff)?Alias

NewRep73's picture
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Joined: 2009-02-21

People giving you advice to ditch your CFP and become a salesperson and "sell what clients want to buy" are the reason this industry gets a bad reputation.  Comments like that show they lack the integrity and honesty required to represent a client in these volatile economic times.  Next thing you know, they will be telling you to forget about a**et allocation and modern portfolio theory and just sell whatever a client asks for.   Do not listen to that kind of advice.  You owe it to clients to provide sound advice and protect them from themselves.

Crooked Salesman's picture
Joined: 2009-02-21

NewRep73 wrote:
People giving you advice to ditch your CFP and become a salesperson and "sell what clients want to buy" are the reason this industry gets a bad reputation.  Comments like that show they lack the integrity and honesty required to represent a client in these volatile economic times.  Next thing you know, they will be telling you to forget about a**et allocation and modern portfolio theory and just sell whatever a client asks for.   Do not listen to that kind of advice.  You owe it to clients to provide sound advice and protect them from themselves.
 
 
Yeah...It's always better to sell them what they don't want to buy.

deekay's picture
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How's a**et allocation and MPT been working the last 18 months?
 
Oh, right.

NewRep73's picture
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It's frustrating to encourage integrity and see others who seem to think the best thing for a financial advisor to do is to ignore diversification and sell whatever the client likes, regardless of whether it is appropriate for their risk profile. 
If it is speculative stock picking they espouse, and they think they are great market timers or can pick out the great market timers from their platforms, then I would suggest John Bogle has written plenty of books citing the preponderance of evidence in academic studies of historical returns.  David Swensen provides another intelligent perspective on the market in regards to this subject area.  As does everyone's favorite, Warren Buffett.

WealthManager's picture
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NewRep73 wrote:It's frustrating to encourage integrity and see others who seem to think the best thing for a financial advisor to do is to ignore diversification and sell whatever the client likes, regardless of whether it is appropriate for their risk profile. 
 
One guy I know only sells people indexed annuities with a 10-year surrender charge.  What bothers me is that he calls himself a financial planner.  How can it always be in the client’s best interest if all you have is one product…one very expensive product.
<?: prefix = o ns = "urn:schemas-microsoft-com:office:office" /> 
--WM
 

WallStreet*E's picture
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Joined: 2009-02-17

Have you thought of going independent? A lot of guys from ML are going independent instead of starting their own RIA so that they don't have the compliance headache. 

Ash's picture
Ash
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I think independent is a good idea.  Joining an independent firm might be a good idea to start.  I have an RIA (I am an CFP also) where I am recruiting the ML advisors into.  But I also believe that each advisors should have their own RIA.  So one of my criteria is that the advisor should be able to mature into their own RIA in about two years.  And yes I will help you do that.  But you also need to decide if you are serious about this business.  You will probably stuggle for the next year or so.  We can help you grow, but it is really upto you to drink the water.  Send me an email if you are interested.ashashprinceton@gmail.comwww.FAfreedom.com - The Breakaway Experts

hostmaster's picture
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NewRep73 wrote:If it is speculative stock picking they espouse, and they think they
are great market timers or can pick out the great market timers from
their platforms, then I would suggest John Bogle has written plenty of
books citing the preponderance of evidence in academic studies of
historical returns.  David Swensen provides another
intelligent perspective on the market in regards to this subject area. 
As does everyone's favorite, Warren Buffett.Swensen uses active managers pretty much exclusively, except perhaps for his timber holdings.  Warren Buffett is the consumate active manager (you could even say activist) and not beyond making gigantic allocation shifts (he confessed in an NYT op-ed in Octobr '08 that his personal account had been 100 percent t-bills until the post-lehman selloff).   I don't know what we can learn from Swensen and Buffett about index funds, except that they say the non-professional or casual investor is better served by low-cost index funds than by trying to pick managers.  That's probably spot on.If you're a professional and hold yourself out as such, I feel you have to do some work to earn your keep.  And being an active investor doesn't mean you invest only in speculative stocks, or market time (though long-cycle timers are laughing all the way to the bank right now).Rigid asset allocation is, and has always been, a crutch.  If you don't have an opinion on what is rich and what is cheap, and don't bother to size positions and put together portfolios, why bother with this profession?  It's easier to sell stuff...

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