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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


Building a Spoke Fund®: Critical Path Items

As per my last post, here are the things I’d recommend new portfolio managers consider to jump start the launch of your own Spoke Fund®. A couple of notes first:

My apologies for the delay in posting these. I’ve been amazed at the feedback I’ve gotten on the first few posts. That said, our portfolios and our investors are my priority, for obvious reasons. Fortunately the new Keurig is here, so the sandman can wait.

The questions I’ve gotten have made me realize that I need to try to get you all more info – more answers, more details and more philosophy.

More Answers

I created this email list to more efficiently answer questions – the specific, detailed kind that 95% of the readers of this blog may find too wonkish, but that may make a difference when starting your Spoke Fund®. Please sign up for the wonky stuff.

Along the same lines, if you’re on LinkedIn, I created a Spoke Fund® Managers group. Join by clicking here. It may prove useful in helping you get things done without waiting for me to respond. If you’re not on LinkedIn, give it a whirl. It’s like Facebook without the stalkers.

More Details

Give me a few months and I’ll put together the definitive guide to starting a Spoke Fund®. Seems like the perfect topic for an ebook. There will be some overlap between this blog and the ebook, but in general I’ll be able to get more into the details you’re asking for in the ebook…without making the investors who read this blog go narcoleptic.

More Philosophy

Posting more thoughts on my own philosophy behind building a spoke fund should help you identify the ways you’d like to build yours differently. In a nutshell – I already live in paradise, own the home I’m going to die in and have a couple of good fishing rods. At this point in my life I’m more concerned with helping to make the managing of other people’s money a noble profession again than I am with buying more toys.

You may be in a different place in your own life. If you need to charge fees higher than I do to get there, or set higher account minimums, so be it. I’m viewing this exercise as something like open source software: put the basic code out there and let a bunch of smart people run with it on their own. So, go nuts – and let’s each agree to try to make it easier for the next guy or gal who comes along.

Now, if you want to make a ton of money relatively quickly as a portfolio manager, there is no denying that you may be better off starting a hedge fund. Just realize that any business that has no barriers to entry and is prohibited from advertising could be a very hard one for all but a fortunate few.

Bottom line: look for a “Spoke Fund manifesto” as soon as I can get to it.

Now, on with it.

Critical Path

The first thing you’ll need to do before setting up your Spoke Fund® is to set up your company. More specifically, you’ll need to decide what structure you want your firm to have.

That question may be one you want to bounce off some folks. Google searches seemed a bit lacking in real insight on this decision to me, so after talking to individuals in several different professional services firms and a few accountant friends, I decided to form Islamorada Investment Management as a limited liability partnership.

I chose the LLP structure because I wanted the firm to serve as a retirement plan of sorts. My thinking was that I’d grow the business, eventually bring on (or grow our own) partners, and then should I ever decide I wanted to go flats fishing every day, I could still receive distributions from the partnership long after I left.

There are plenty of good reasons to pick a different structure, however, and an LLC might make more sense for you. This brings me to…

Critical Path Item #1:

Find a good local accountant or CPA firm to help you set up your company.

You could take a do-it-yourself approach to setting up. It’s easy enough to get an EIN from the IRS. But if you don’t know what you don’t know, it’s easy to miss something important. The opportunity cost of doing many of these start-up tasks yourself is also pretty high. It’s time you’re not spending doing the research you need to on the companies that will be in your fund. In the case of finding an accountant, it also means missing an opportunity to make what could prove to be some pretty important local connections.

I’d look for these three criteria in an accountant:

1 – Expertise with QuickBooks.
2 – The ability to verify the returns of your Spoke Fund®.
3 – The potential to refer clients your way.

Ask your accountant about which might be the best form of business given your own long-term plans. Make sure they explain to you the tax effects of being self-employed, as well as what will be required by your state. And ask about local businesses licenses or any permits you might need if you plan to work out of your house.

On a month-to-month basis, your need for an accountant’s services will likely be minimal. Businesses don’t get much simpler from an accounting standpoint than investment management firms. But when you really need an accountant, it will have paid to put some time into this relationship early on.

Critical Path Item #2:

Get the RIA ball rolling.

Becoming a Registered Investment Advisor is critical to the spoke fund business model. Among other things, it demonstrates to your clients that you are an independent fiduciary, or a protector of their wealth, not another Wall Street hustler. More practically speaking, you also need to be an RIA to get access to the FolioFN Institutional platform that will enable you to efficiently manage your spoke fund. Same for any of the other platforms that are anywhere near FolioFN’s.

As in Step 1, you technically could take a do-it-yourself approach here, but I would strongly advise against this. Why? In a word – compliance. If you’re starting out as a one-person shop, you will be the de facto Chief Compliance Officer, and that carries some heavy legal responsibilities. If you’re new to that role, like I was, you’ll need help in understanding what role will require of you every day.

My recommendation is to outsource the process of getting set up as an RIA. More specifically, contact Zachary Gronich at RIA in a Box. I used Zachary to start up and recommend him strongly. RIA in a Box is a one stop shop. They’re quick, accurate and relatively inexpensive. They’ve also set up over 650 RIAs nationwide, both at the state and SEC level. Here is their latest fee schedule, as well as the list of services they provide.

As Zachary will explain to you, if you’re not already a CFP or CFA charterholder, you’ll need to take the Series 65 test, too, prior to him filing your RIA application. I bought this book from Kaplan, studied hard for a week and passed the 65 with no problems. Don’t take it lightly – it contains a lot of pretty specific material. Compared to the CFA tests, though, the 65 is a breeze.

The process of becoming an RIA could take a few months, so I’d start immediately after you’ve set up your company. The next two steps are important, but won’t take nearly as long to do. If you’re done with both by the time your RIA application is approved, you’ll be ahead of the game.

Also, if you need any ideas about how to answer some of the questions Zachary asks for your application, you can reference my own firm’s Form ADV here, or post a question in the comments section. We’ll cover how to determine your fee schedule later here, too.

Critical Path Item #3:

Pick your technologies.

This could easily be a 3,000 word post all by itself, but in the spirit of Twitter, here are my recommendations in 140 characters or less.

Get a Mac. Use MS Office on it. Get VMWare Fusion if you need Windows. Use Mozy for backups. Use Gmail for emails. Get an iPhone. Firefox!

I run my firm using a MacBook Pro laptop and an iPhone. In order to scale as much as possible without having to hire employees, I use a handful of different tech tools. I confess I am a mild tech geek. I spent a few years in telecom, know a little HTML and like shiny things that beep. That said, I have plenty more to learn. I’ll talk more about software tools later, but for now, you need the basics to get set up.

If you’ve never used a Mac before, consider making the switch. But be warned. You’ll never want to return to PC-land. If there are programs you absolutely need to have, and they’re only available in Windows versions, get VMWare’s Fusion program and you’re covered. (Note: Apple’s Boot Camp program lets you switch between the two Operating Systems, too, but you’ve got to reboot to do it. Fusion lets you switch without rebooting.)

Back-ups are critical to meet your compliance requirements, and you need to start backing up emails (all of them, and I underscore all) from day one. The easiest/cheapest tool I found was Mozy. No-brainer.

Also, I use QuickBooks Online. Same functionality as regular QuickBooks, but it’s all hosted online so you don’t have to mess with updates, downloads, encryption keys, etc. Everything is done in your browser. I recommend getting that early in your set up process, too, if for no other reason than to start recording your expenses.

Plus, with the online version of QuickBooks, should I ever want to outsource our invoicing or data entry, it’s easy to enable remote access by a third party – so I don’t have to bring my machine to them, or vice versa. It’s also easy for the accountants to take a peak whenever I call in with a question. And thanks to the QuickBooks online app on the iPhone, I’ve got one-touch access to all of my firm’s financial reports, anytime.

How did people ever get anything done before the internet?

Critical Path Item #4:

Get chromed up.

You’ll need a logo, letterhead, business cards, and a website at a minimum. Eventually you may want envelopes, brochures, and folders, but you’ve got some time for those.

Please note that your logo, website and general corporate identity are much more important than the abbreviated list below might otherwise indicate. Marketers will tell you your brand is everything, and while that may be true, it’s also organic, meaning you probably can’t define it yourself by just picking a certain color. Take some time and think hard here about what you’re trying to convey. I’d give yourself a defined number of days to learn, doodle, and bang your head against the wall – and then get on with it. You’re after “good” right now. You can make it “perfect” later.

On the logo and business cards – we eventually had both done through a designer we found through and I couldn’t have been happier. Crowdspring takes a novel approach in that you post your thoughts on what you want, and then designers from all over submit actual logos based on your input. You keep giving feedback on each design until a winner emerges.

Crowdspring guarantees you’ll get at least 25 responses to your project, and we ended up getting quite a few more. The logo we eventually chose was actually designed by an artist in Serbia. Needless to say we probably would never have otherwise crossed paths. Best part is you pick the price, and for what we would have paid to have two designers give us four concepts and two revisions at Logoworks, we had about 35 sets of eyeballs on our idea, each giving us unlimited revisions. Brilliant.

Before we get to web design, I’d recommend you pick your own domain name first. And to make reserving your domain name as easy as possible, I’d recommend picking your own webhost first.

The webhost is the company that keeps your website files on their server for all the world to access. Most good webhosts will let you search for domain names and reserve them through their sites, which will save you the hassle of reserving a domain name at NSI or GoDaddy, but then trying to transfer those names over later when you discover you need more features (or better customer service) later on.

There is no shortcut to finding a domain name that works, however. If not through your webhost, you can always search for names that are available at the NSI site and buy them elsewhere. Brainstorm, check if available, then repeat until you’re happy.

Whole treatises can be written on choosing a domain name, but in general, I’d say keep it a dot com (as opposed to .net, .org, .us, etc.) and go for something as short and memorable as possible. Domain names are cheap, so grab a couple if you need to hedge your bets.

We host both our firm’s site and this blog on Hostway, which appears to be having a 50% off sale as I type. There are certainly plenty of other good hosts around. Assuming you’re not going to get too crazy with your site’s features, just about any basic starter package should do. (Note: If you choose to follow the tip below about using WordPress for your website, you will want to make sure your webhost meets these requirements.)

Picking a website designer is more challenging. On the do-it-yourself front, you can pick a cheap template (Google “HTML Templates), find a free web editor (like Kompozer for the Mac), and dive in. I went the ultra-cheap route for our website our first six months, creating a simple one page site with links to various files and an embedded movie I created right in the middle of that single page. Eventually, though, you’ll need to upscale your website, and I suspect you’ll accelerate how quickly you add assets by doing it sooner rather than later.

Crowdspring offers a website design service, too, and it’s probably worth considering. I wanted our firm’s site to be done locally in the Keys, though, and after a false start going to a friend-of-a-friend who couldn’t get it done, we went with the fine folks at This blog was done by another firm, Moxie Design. I can also personally vouch for the good work done by Outcome Labs.

Everybody (and I mean everybody) knows somebody “who does websites,” but it’s helpful to have a framework to think about what you want in your site before you go too far down any of those paths. Here are a few links from folks much smarter than I about all this:

The Do’s and Don’ts of Website Design
The First Question Every Website Designer Must Ask
How To Create A Good Enough Website
How To Create A Great Website

One other tip: it’s worth considering using WordPress for your website. It’s a free open source publishing and content management system that originally started out as a blogging platform, but it’s advanced to the stage now where terrific sites are being built on it. Had I known back when I started up what I know now about WordPress (which is used on this blog), I might have used a WordPress template for our firm’s main site. To find a WordPress template, check out this section of the WordPress site or Google “wordpress themes” and start clicking.

At this stage, I’d focus on finding the right look and feel, and plan on writing the content (text) yourself. It’s a great exercise in articulating your business to others, too.

Once you’ve gotten each of the tasks above started, you’ll have plenty of time to come back and think deep thoughts about the strategic parts of your business as progress on those critical items continues in the background.

More on that, coming up.