Meeting with XC (Part 3)

Today I conclude with summarized notes from my meeting with financial adviser XC on August 22, 2017.

If I want to find people with a disproportionate equity concentration then XC suggested looking at Domino’s Pizza, headquartered locally, which has gone from $8 to $160 in recent years. Ford is another possibility (think of all the commuters going to Dearborn every day) along with DTE Energy and Consumers Energy.

XC is a believer in credentials: the more the better. Series 65 is the minimum requirement to manage money in Michigan but it’s given by FINRA, which is focused more on brokerages. He suggested looking into options/derivatives licenses as well.*

Hypothetically speaking, if he advised for one of my trading clients then I would be my own solo practitioner. He would not officially recommend me—doing so would put his company’s reputation at risk—but he would be interested in my performance. He would also be mindful of my fees. If I were generating a lot of short-term capital gains for a client with an annual capital gains budget then it might affect how he would manage their trading portion. The more fees I charge, the less the overall AUM, which would lower his compensation. This could be a potential conflict of interest.

If I were to pitch my trading strategy then XC said they would have to play devil’s advocate by addressing risk and liability exposure. I was not sure whether or not this was intended to be a hint.

XC recommends Schwab Advisor Services at >$5M AUM because of the useful tools they offer. At $25M AUM they pair you with a corporate relationship expert.

XC seemed like a sincerely nice person with a solid knowledge base. He was also generous with 100 minutes of his weekday time. If I start an IA then he said he would be interested to hear how I progress. If I need anything further then he invited me to call. He expressed interest in reading my blog and suggested again that I check out their website and available tools.

I took a few useful suggestions away from our meeting. I will make a LinkedIn profile. I will think more about putting together a presentation of my story and/or what I do. I will also look into whether any [insurance] companies might be looking for IAs to manage their cash position.

*–Series 3 is the National Commodities Future Examination and Series 4 is the Registered Options Principal Examination. I question the relevance of the former to trading options and I’m doubtful about the latter, which deals with supervising option traders and trading activity.

Meeting with XC (Part 2)

I continue today with summarized notes from my meeting with financial adviser XC on August 22, 2017.

XC managed assets for an insurance company that grew to over $200M AUM through some fortuitous M/A activity. His first personal clients were co-workers who liked what he did with corporate funds and asked him to manage their money. This was $25M in a single-shot that he credits more to luck than he does to investing skill.

XC introduced me to E/O (errors and omissions) insurance. One example of an E/O situation is where the IA goes to buy 25,000 stock shares of stock for a client and accidentally enters the wrong ticker symbol. The IA would be liable for any losses and E/O insurance would protect the firm. I did not get the chance to ask about cost.

He talked a lot about some of the free tools located on his company’s website, which allow clients to make future growth projections and to see how their overall financial situation is progressing. He suggested I check out these tools and encouraged entry of some personal information to see what it says about me.

After discussing these tools for a few minutes I pointed out that trading, not financial planning, is what I want to do. Even so, he argued, I should not aim to be a trader who has no personal relationship with clients. Talking about their total financial plan and where I fit in is a way to avoid such anonymity that could otherwise leave clients’ future satisfaction solely dependent on my trading performance [“everyone knows” no strategy works well in all markets]. XC said client turnover is very costly in this industry because expenses to the firm are front-loaded.

Getting back to the website, XC said they post a blog every 2-3 weeks of 1,000 words or less. They rarely post market commentary because he doesn’t want content to be time-limited. He said the blog is a really good way to get an idea of how/what someone thinks. The posting date (although it may be changed or the post deleted) adds context about current events surrounding a stated viewpoint.

He attributes a lot of his success to networking. Some of his jobs arose because of people he knew as far back as college.

XC talked about a gynecologist he knew who later went into finance. He was interested in trading but didn’t want to be the one doing the trading. Instead he did extensive research on a broad spectrum of wealth managers and became an encyclopedia of available offerings in the industry. Combining this with his knowledge of physicians’ backgrounds and needs, he was able to talk to clients and make (give) relevant recommendations (advice).

I will conclude next time.

Meeting with XC (Part 1)

On August 22, 2017, I met with a financial adviser to share my story, to learn about his, and to hear any ideas or suggestions he might have about transitioning my career toward the IA domain.

Although I have removed/changed his name (initials), I would feel comfortable recommending XC to anyone looking for a financial adviser. Please e-mail me if that might be you.

I was shocked to realize our meeting had lasted 100 minutes. XC was very generous with his weekday time.

As part of their service, XC’s firm trades securities for clients and he believes their edge is 25-50 basis points. For smaller net-worth clients they use ETFs. For larger net-worth individuals they use individual equities. They do a fair bit of covered call writing as a mechanism to defer capital gains taxes. On two occasions he mentioned an example where someone with a large equity position and low cost basis would trigger heavy capital gains upon sale.

I am very curious to know more about their trading edge. Does he believe in CCs as a mechanism for outperformance? Where did they procure their trading expertise? How were they trained? Do they make consistent efforts to improve? If so then how? I believe it’s important to remain focused on realistic returns but I would also recommend any self-directed investor to aim higher than 50 basis points.

XC believes the money management industry is a highly competitive space with a low barrier to entry. He estimates a start-up cost of $50K to start an IA—much higher than I would have guessed!—and significantly less on an ongoing, annual basis.

He thinks my best chance for success is to find people interested in my particular type of trading and/or what I offer. I asked if he thinks the average investor is educated enough to understand what I do and he said no: the average investor doesn’t really care much about how the IA generates returns. This struck me as contradictory: why try to find people interested in my type of trading if they can’t understand what I tell them?

XC recommended I subscribe to LinkedIn professional as a way to find others who share my niche expertise and interest. His preferred approach to networking is finding someone else who knows the target and asking that person to refer me.

He also suggested I speak with the Ross School of Business (daughter’s alma mater) to find others working on related [option trading] projects.

I will continue next time.