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Going RIA

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Topic: Going RIA
Posted By: Moraen
Subject: Going RIA
Date Posted: May/20/2010 at 6:11pm
When I left Jones I had planned for over a year.  About a year and a half.  I made a TON of mistakes.  Hopefully this thread will prevent that from happening.

I left precisely one month after my 3 years was up.  I left over Thanksgiving.  My BOA was going to be out of the office the entire next week.  I thought that it would be the perfect time to leave.

When I left, my office was completely prepared.  I had a few other issues.  Fidelity had to receive my resignation letter from Jones before I left before they would send me the paperwork.  Still, I got it finished fairly quickly.

The following are some issues I had.

1)  In order to save money, my wife designed the website.  She is good, but not a professional, and the result was nice, but buggy.  Things didn't work quite as I wanted them to.  Pay the money and get a good website

2)  Leaving in November is possibly the worst possible month you can leave.  Very few people want to make any changes before January.  My contract says that I bill in arrears, in an effort to show my clients that this wasn't about money.  However, I was looking at at least the third or fourth week of January before transfers would occur.  Not to mention that I wasn't really good at the whole paperwork thing, and there were many SNAFUS.

3)  Train on all of the modules your custodian provides.  This will help you to become familiar with all of the processes they use.  Fidelity provided a wealth of information, but I didn't capitalize on it.

4)  When your clients contact you, explain the situation.  I left for XXXXX reasons.  If you've prepped right, they will come right on over.

5)  Have about 12 months of expenses saved.  I saved six.  You will run into unexpected costs

6)  Have a prospecting plan.  I didn't.  I tried cold-calling with some cockamamie plan, but it didn't work. Make sure that your goals are measurable and that you are keeping track.

7)  Remember that you are running a business.  You are not just running a practice.  Businesses have more moving parts.  Analyzing and keeping track of your income and expenses, by source will help you to grow.

8)  Another thing I didn't do is prepare my wife for the worst.  In addition, three months before that I turned down a huge transfer bonus from SB and made the mistake of telling my wife about it.  Know what you are going to do and stick to the plan.

9)  Make sure that your investment philosophy is clearly stated (preferably on your website as well as your brochures).  I had so many different messages I wanted to provide that even I was confused.  Make sure you have a singular, concise message to get out.  And you need a differentiating factor.  One that people will identify with.  One thing about the crisis - NOT being at a wire was incredibly helpful.

10)  Branding.  Make sure EVERYTHING you have is branded.  On the CD I give clients that has my ADV II.  It has the standard ADV format, but now I also have one that uses our colors, fonts etc.  Nobody ever clicks on the boring one.

11)  Folders are fucking expensive.  Don't buy them.

12)  Have some gimmick that you give to your A list clients.  I bought M&Ms with our logo and tagline on them, with the new company colors.  They ate them up (no pun intended).  I also personally delivered them to key referral centers.

13)  Hire a compliance consultant like Wet Blanket.  The amount of detail and work he puts in are amazing.  Don't try and do it yourself.  You will learn a ton about compliance from him, and you will need the knowledge.  Great for the price.

14)  One more time, don't do the compliance yourself!


15)  Don't overspend.  I bought some nice furniture (at a discount), but I bought too many pieces.

16)  Decide whether you are going to run a firm, or whether you are going to be a solo practice.  Then develop a growth strategy.  I am a very "big picture" person.  I hired some people fairly quickly, and they flamed out.  I know have a more balanced plan.  It is still aggressive, but it is tempered.  

17)  Don't be afraid to hire college students.  They work on the cheap, and you can find some incredibly intelligent ones.  Use all of their business talents.  

18)  Remember that you are now a business owner.  I can't stress this enough.  While you may not be as big as the big boys, ACTING like you are one of the big boys helps tremendously.

19)  Create a blog and consistently post in it (this one is optional), but having any publication is usually seen as credible.  Try to right for some industry publications.  I have a few that I write for pretty consistently.  I send out copies of the publication to my clients and prospects.  They eat it up.  I recently published an article on Social Security.  This week alone, I have received seven contacts from people about to retire that want to come in and have a conversation.  Also, see if you can become a reviewer for trade journals.  Journal for Financial Planning is full up, but there are others.  The AI one needs several reviewers.

20)  Don't be afraid to think outside of the box.  I know that people want to traditionally do cold calling, and I'm not knocking it.  Do it if your business is not coming from other sources.  But automating your business by using things like Facebook, GoogleAdwords, Twitter, will help keep you in the know.

21)  Volunteer to be interviewed by financial writers.  Nothing says expert like a comment in a newspaper or magazine.

22)  Don't be afraid to go after big fish.  

23)  Another thing I didn't do was manage my time very well.  At first, the priority is transfers.  You've heard this numerous times.  

Your priority list should go as follows:

1)  Transfers
2)  Transfers
3)  Transfers
4)  Marketing
5)  Reassuring your clients that everything will be better (by having a plan and a mission statement)
6)  Prospecting
7)  Other business management

24)  Hire a performance reporting company that will manage your fees and send out your company statements (your custodian will send their brokerage statement). I did all of this myself.  It sucked.  It was fun for me, because I like doing that sort of thing, but it took time away from the things that generated revenue.  Just because something is fun to do, doesn't make it a priority.

25)  CRM - I set up a decent CRM program myself.  But I did it ahead of time.  Most things can integrate together.   

26)  Financial planning/Investment analysis software.  Get it.  If you don't already have a program.  I once again have my own.  However, it did not look professional until I had a graphic designer to make it so.

27)  Remember your family.  You are doing this for them, but you need to keep them in mind.  

28)  Use a business suite through a business for payroll and such.  It's inexpensive, and will save you a lot of time.  My taxes are automatically calculated, and sent it.  Even the forms are filed automatically.  SS, Medicare, etc.

29)  Once you get everybody transferred, take a long weekend, at the beach, somewhere you like.  You will need it.  My hair had a little silver in it.  Four months into starting, I looked like Bill Clinton after eight years of the Presidency.

30)  Be proud of yourself.  You have done something that a very small minority of people will EVER do.  To me it is more courageous than jumping into the middle of a firefight.  It requires overcoming more than one aspect of fear.  Fear of rejection.  Fear of failure.  Fear of losing your shirt.  Fear of losing your family.  Fear of disappointing your family.  The courage that it requires to make the leap to RIA is something that nobody can ever take away from you.  If you fail, you failed with honor.  If you succeed, you will know success beyond anything.

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.



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I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: If you fuck with me, I’ll kill you all. - General James Mattis

Fiduciary as Fuck - iMo



Replies:
Posted By: B24
Date Posted: May/20/2010 at 9:02pm
Damn good schidt.

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"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: mlgone
Date Posted: May/20/2010 at 9:14pm
MO

Best post ever IMO.  GREAT STUFF.  Thank you for your time


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bustin members BS... day after day.


Posted By: Moraen
Date Posted: May/20/2010 at 9:18pm
Looks like when Wet moved this I can't edit.  But as an edit, for the priorities, switch 4) and 6).


Posted By: B24
Date Posted: May/20/2010 at 9:24pm

How do clients react to ticket charges?  Or do you eat them?

Also, just curious, you talk about how your focus is portfolio management, and prefer to leave the client mgmt to the staff (or that's your goal).  Why don't you dedicate more of your website to your investment strategy(s)?



-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: B24
Date Posted: May/20/2010 at 9:26pm
Damn it.  No edits.
 
Have you implemented a minimum?


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: SometimesNowhere
Date Posted: May/20/2010 at 9:31pm
Fuck...I'm at least 2 years away then...hypothetically.

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I sort of give a fuck.


Posted By: Wet_Blanket
Date Posted: May/20/2010 at 10:05pm
I've added editing to this forum.

-------------
1. Sanders wins nom -Pick WiredUp avatar til gen elect. Doesn't pick mine until gen elect.
2. Sanders wins President -WiredUp avatar is mine for his term. Trump wins my avatar is yours for 2nd term.


Posted By: Moraen
Date Posted: May/20/2010 at 10:48pm
Originally posted by B24 B24 wrote:

How do clients react to ticket charges?  Or do you eat them?

Also, just curious, you talk about how your focus is portfolio management, and prefer to leave the client mgmt to the staff (or that's your goal).  Why don't you dedicate more of your website to your investment strategy(s)?


Great questions B.

I do not eat ticket charges, but they are so small, clients have no problem with them.

Website content is tricky.  The hard part is making sure I'm not violating any advertising rules.  The content has been revamped a few times, but it is better to keep it vague.  Wet Blanket can speak more to that.

Also, as you said, I wish I could only do investment management.  The problem is the CFP board has done a great job of advertising holistic financial planning.  


Minimums - Minimum is $100k now, but I'll be raising it in December.


Posted By: Sportsfreak
Date Posted: May/20/2010 at 10:49pm
Originally posted by Moraen Moraen wrote:

[
Also, as you said, I wish I could only do investment management.  The problem is the CFP board has done a great job of advertising holistic financial planning.  


+1


Posted By: Debolt
Date Posted: May/21/2010 at 8:14am

Great post Mo. I am planning to do something similar but my issue is no real book to transfer considering I am on a team and not a senior member. I would be curious if a strong producer and weak infrastructure FA would be interested in starting a firm with a weak producer but strong infrastructure skills.

 

Can you add a list of expenses to move and the expenses ongoing to fund an RIA?

I would ask for cash flow reports but you inflows would not be relative to me or anyone else. Also you do not need to provide your $ expenses, but perhaps your opinion on the least each would cost.

 

note: after reading this back I am not sure it makes sense so let me know if I need to reword my question.

 

Tks again!!!



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Check the charts: October 3, 1974 = March 9, 2009   Quit making excuses and sell something!!

Obstacles are those frightful things you see when you take your eyes off your goal. - Henry Ford


Posted By: Moraen
Date Posted: May/21/2010 at 8:39am
Originally posted by Debolt Debolt wrote:

Great post Mo. I am planning to do something similar but my issue is no real book to transfer considering I am on a team and not a senior member. I would be curious if a strong producer and weak infrastructure FA would be interested in starting a firm with a weak producer but strong infrastructure skills.

 

Can you add a list of expenses to move and the expenses ongoing to fund an RIA?

I would ask for cash flow reports but you inflows would not be relative to me or anyone else. Also you do not need to provide your $ expenses, but perhaps your opinion on the least each would cost.

 

note: after reading this back I am not sure it makes sense so let me know if I need to reword my question.

 

Tks again!!!



D -  I think I get what you are saying.  I'll try and post that info later. 

I just realized that I should have had all of that in the original post.


Posted By: Debolt
Date Posted: May/21/2010 at 8:52am
What you have provided already is more then we deserve. Thank you for your time and thank you for all the other (YOU KNOW WHO ALL YOU ARE) for helping provide me and others with the roadmap to success!!!

-------------
Check the charts: October 3, 1974 = March 9, 2009   Quit making excuses and sell something!!

Obstacles are those frightful things you see when you take your eyes off your goal. - Henry Ford


Posted By: B24
Date Posted: May/21/2010 at 12:10pm
Originally posted by Moraen Moraen wrote:

Originally posted by B24 B24 wrote:

How do clients react to ticket charges?  Or do you eat them?

Also, just curious, you talk about how your focus is portfolio management, and prefer to leave the client mgmt to the staff (or that's your goal).  Why don't you dedicate more of your website to your investment strategy(s)?


Great questions B.

I do not eat ticket charges, but they are so small, clients have no problem with them.

Website content is tricky.  The hard part is making sure I'm not violating any advertising rules.  The content has been revamped a few times, but it is better to keep it vague.  Wet Blanket can speak more to that.

Also, as you said, I wish I could only do investment management.  The problem is the CFP board has done a great job of advertising holistic financial planning.  
Minimums - Minimum is $100k now, but I'll be raising it in December.
 
Interesting.  Somehow I thought your investment management was transaction-heavy.  Wrong?


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Indyone
Date Posted: May/21/2010 at 12:14pm
Well said, Mo...I lived several aspects of your story and it's a great feeling when you get over that hump...

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"Independence is like the Berlin Wall. People are only jumping in one direction." - Philip Palaveev - November 2005. "You are never free...unless you are independent..." - Indyone - May 2005.


Posted By: Moraen
Date Posted: May/21/2010 at 12:33pm
Originally posted by B24 B24 wrote:

Originally posted by Moraen Moraen wrote:

Originally posted by B24 B24 wrote:

How do clients react to ticket charges?  Or do you eat them?

Also, just curious, you talk about how your focus is portfolio management, and prefer to leave the client mgmt to the staff (or that's your goal).  Why don't you dedicate more of your website to your investment strategy(s)?


Great questions B.

I do not eat ticket charges, but they are so small, clients have no problem with them.

Website content is tricky.  The hard part is making sure I'm not violating any advertising rules.  The content has been revamped a few times, but it is better to keep it vague.  Wet Blanket can speak more to that.

Also, as you said, I wish I could only do investment management.  The problem is the CFP board has done a great job of advertising holistic financial planning.  
Minimums - Minimum is $100k now, but I'll be raising it in December.
 
Interesting.  Somehow I thought your investment management was transaction-heavy.  Wrong?


No.  Not a whole lot of transactions. 


Posted By: Wet_Blanket
Date Posted: May/21/2010 at 1:14pm
I enjoyed the part of making the mistake of telling your wife about the transfer bonus.

-------------
1. Sanders wins nom -Pick WiredUp avatar til gen elect. Doesn't pick mine until gen elect.
2. Sanders wins President -WiredUp avatar is mine for his term. Trump wins my avatar is yours for 2nd term.


Posted By: B24
Date Posted: May/21/2010 at 1:26pm
Originally posted by Wet_Blanket Wet_Blanket wrote:

I enjoyed the part of making the mistake of telling your wife about the transfer bonus.
 
Funny...I used be a corporate finance director.  I was responsible for calculating the Executive Bonuses, and submitting to payroll for payment (Payroll fell under me as well).  Every year like clockwork, right after I presented the bonus calcs to my Executive Team, a few of the guys would wander into my office, casually asking if they could get their bonuses paid out to them, but NOT by direct deposit.  Of course, that would have just been too much work, so I would never do it (changing deposit rules for one pay, etc.).  But you ask them why, and the response was always the same "ahhh, the old lady doesn't need to know about it.  she gets the paycheck, she spends enough.  this is my little stash."  I'm like, seriously?  It's not like we're talking about 500 bucks to go out and buy some beer and a new toy or something.  We're talking mid-to-high 5 digits, sometimes 6.  And these guys were trying to hide it!  Very funny stuff.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Wet_Blanket
Date Posted: May/21/2010 at 1:46pm
That's why I have a secret bank account.

-------------
1. Sanders wins nom -Pick WiredUp avatar til gen elect. Doesn't pick mine until gen elect.
2. Sanders wins President -WiredUp avatar is mine for his term. Trump wins my avatar is yours for 2nd term.


Posted By: Moraen
Date Posted: May/21/2010 at 2:18pm
For a Mod, who is supposed to keep these threads clean, you certainly fuck them up with your crap about other people's wives.

Wink


Posted By: moneyguy
Date Posted: May/21/2010 at 3:19pm

Great post!  It seems the custodian selection process is pretty important, as it looks like it sets the groundwork for a lot of the technology that integrates into it.  Can you talk a bit about your custodian selection.  You may have explained why you chose Fidelity previously, but I didn't find it, and it could be good to include here in terms of "what one should look for".  .  Also, what performance management reporting did you select, do you like it?  You mentioned in another post that you use a paperless office.  Is that a function of software/technology you purchased, or just your own process?  How do you store and backup your data?  I could ask a million questions, but these are what came to mind. 



Posted By: Guests
Date Posted: May/21/2010 at 6:16pm
Why RIA over broker?


Posted By: Moraen
Date Posted: May/21/2010 at 6:21pm
I'll try to answer the other questions later.

But just to answer Volt's question real quick...

Being a broker lacks flexibility in marketing.  In addition, I wanted no hands in my pocket.  I prefer to control ALL of the costs.  It requires more work, but there are tradeoffs either way.  Basically there are plenty of more freedoms associated with being an RIA.

In addition, RIAs don't have to worry about FINRA.  I hate FINRA.  We are regulated by the states and the SEC.


Posted By: cali123
Date Posted: May/21/2010 at 6:32pm
Originally posted by Moraen Moraen wrote:

  I hate FINRA.  

+1


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Its just something about your face. I wanna punch you right in the suck hole! POW!


Posted By: Wet_Blanket
Date Posted: May/21/2010 at 6:46pm
Originally posted by cali123 cali123 wrote:

Originally posted by Moraen Moraen wrote:

  I hate FINRA.  

+1
 
Amen.  Although all FINRA people I've interacted with where pretty cool (it wasn't an audit situation).  Not to hijack, but I do like how much guidance they give on isses (unlike the SEC).


-------------
1. Sanders wins nom -Pick WiredUp avatar til gen elect. Doesn't pick mine until gen elect.
2. Sanders wins President -WiredUp avatar is mine for his term. Trump wins my avatar is yours for 2nd term.


Posted By: Moraen
Date Posted: May/23/2010 at 11:15am
Originally posted by Debolt Debolt wrote:

Great post Mo. I am planning to do something similar but my issue is no real book to transfer considering I am on a team and not a senior member. I would be curious if a strong producer and weak infrastructure FA would be interested in starting a firm with a weak producer but strong infrastructure skills.

 

Can you add a list of expenses to move and the expenses ongoing to fund an RIA?

I would ask for cash flow reports but you inflows would not be relative to me or anyone else. Also you do not need to provide your $ expenses, but perhaps your opinion on the least each would cost.

 

note: after reading this back I am not sure it makes sense so let me know if I need to reword my question.

 

Tks again!!!



D - I overspent on expenses to move.  Got some nice furniture, iMac for every office and the front desk.  Things that I didn't necessarily need when I left.

I can email you my report for my first year in business (or first two months, since that has all of the initial start up expenses.

Ongoing expenses for me are payroll (largest), rent (I was going to buy another building but it is a cost I'd rather not incur right now), Orion performance reporting, Cable, and power.  Also a few ongoing things like GoogleAdwords (which changes monthly) and business suite at Bank of America.  About $30 a month to handle bookkeeping and payroll.

I would say if you work out of your house, by yourself, you could have expenses of around $500/month.  If you have an office of just you and an assistant, you could get away with $2500 - $3000 per month.  Breaking down expenses just won't help you, as my situation is completely different than yours would be.

I know for a fact that there are some guys who are just REALLY good at sales that need someone who is good at the advising part.  There is a guy here who was selling shit he didn't know how to do.  He ended up hiring a guy who had been working in various financial capacities at banks for the last thirty years.

This guys was pulling in about $10 million a month in assets, but was bleeding assets because his investments management system was flawed.




Posted By: Moraen
Date Posted: May/23/2010 at 11:22am
Originally posted by moneyguy moneyguy wrote:

Great post!  It seems the custodian selection process is pretty important, as it looks like it sets the groundwork for a lot of the technology that integrates into it.  Can you talk a bit about your custodian selection.  You may have explained why you chose Fidelity previously, but I didn't find it, and it could be good to include here in terms of "what one should look for".  .  Also, what performance management reporting did you select, do you like it?  You mentioned in another post that you use a paperless office.  Is that a function of software/technology you purchased, or just your own process?  How do you store and backup your data?  I could ask a million questions, but these are what came to mind. 



I chose Fidelity because I was too lazy to do any other research.  Although I got lucky I think in my choice.  They aren't the most attentive, but the program is robust, and I like it.

Orion has the best performance reporting IMHO. 

My office is as paperless as it gets.  Our signature pages are kept online even.  But I do print stuff out because I can't stand looking at the computer for somethings.

Most of that is simply scanner technology.  I also utilize RackSpace as a backup, in addition to my local backup of all files.  RackSpace's director of sales is a good friend of mine, so the cost is free for that. 

As for what you should look for in a custodian:

1)  Depends on your style, but I prefer people to leave me alone.  Fidelity for sure does that.

2)  AUM requirements.  Make sure you meet them, or you'll be charged.  I know a guy who went RIA with Fidelity, didn't bring over the requisite assets, and now gets charged $1200 a quarter.

3)  Technology.  Fidelity is behind places like TradePMR and others, as their web-based platform is strictly IE.  If you use Macs, that sucks and you have to use something like Wine to use IE.

4)  Someone that is complementary to your investment style.  If you do a lot of trades, figure out where it would be lowest cost to go.  Options?  Find the lowest cost options provider.

5)  That said, if you can work out the arrangement, you can use multiple custodians.

6)  Fee pulling platform and cashiering program should also be robust.  Make it as easy on yourself as possible.


Posted By: Guests
Date Posted: May/31/2010 at 9:11am
Mo, can you practice across state lines? 


Posted By: Moraen
Date Posted: May/31/2010 at 9:50am
Originally posted by Volt Volt wrote:

Mo, can you practice across state lines? 


Up to five clients before you have to register.  Or if you have a place of business in the other state.

If you are registered with the SEC, you have to file notice filings for more than five clients.


Posted By: Maksim
Date Posted: Jun/14/2010 at 8:48pm
great post.

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Former Amp P1 & UBS, Now RIA and couldn't be happier.





Posted By: Maksim
Date Posted: Jun/14/2010 at 8:49pm
Originally posted by Moraen Moraen wrote:

Originally posted by Volt Volt wrote:

Mo, can you practice across state lines? 


Up to five clients before you have to register.  Or if you have a place of business in the other state.

If you are registered with the SEC, you have to file notice filings for more than five clients.


Just FYI, this is true in most states.


In states like Texas though, it doesnt matter, and even 1 client you have to notice file.



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Former Amp P1 & UBS, Now RIA and couldn't be happier.





Posted By: workinhard
Date Posted: Jan/09/2011 at 6:55pm
The whole living expenses thing... just out of curiousity...
 
Couldn't you get a small business loan for start up... and include a salary for yourself for a year?  I'm not saying you SHOULD, but hypothetically, isn't that doable?


Posted By: RIArules
Date Posted: Jan/09/2011 at 8:27pm
Originally posted by workinhard workinhard wrote:

The whole living expenses thing... just out of curiousity...
 
Couldn't you get a small business loan for start up... and include a salary for yourself for a year?  I'm not saying you SHOULD, but hypothetically, isn't that doable?
If you can find a banker that will do it, sure.  You would be putting your ass on the line, but that's how most startup businesses are built.

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Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/09/2011 at 8:31pm
Originally posted by workinhard workinhard wrote:

The whole living expenses thing... just out of curiousity...
 
Couldn't you get a small business loan for start up... and include a salary for yourself for a year?  I'm not saying you SHOULD, but hypothetically, isn't that doable?
Startup loans are almost non existant for businesses that have been in business for less than 3 years.


Posted By: RIArules
Date Posted: Jan/09/2011 at 8:41pm
Originally posted by LSUAlum LSUAlum wrote:

Originally posted by workinhard workinhard wrote:

The whole living expenses thing... just out of curiousity...
 
Couldn't you get a small business loan for start up... and include a salary for yourself for a year?  I'm not saying you SHOULD, but hypothetically, isn't that doable?
Startup loans are almost non existant for businesses that have been in business for less than 3 years.
If he can get an SBA guaranty specialist to give him the time of day, not really...


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Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: B24
Date Posted: Jan/09/2011 at 9:12pm
Many SBA and SBA-type programs will not fund salaries.  Most are willing to fund capital expenditures, inventory, real estate, etc.  And some of the programs fund on draws, based on specific purchase orders and/or invoices.
If I were a banker, I would think real hard about funding a business where the primary expense is the owner's salary.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: RIArules
Date Posted: Jan/09/2011 at 9:29pm
You are right, that's where the all ubiquitous "working capital" category comes from.  I have written packages and signed checks for some really, really hairbrained ventures.  Usually involving the progeny of good clients, at the behest of my superiors, though.  The low-doc program is littered with these.  I actually cut my teeth coming out of college as an SBA guaranty packaging specialist.

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Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: RIArules
Date Posted: Jan/09/2011 at 9:38pm
Now here's a funny one I had almost forgotten!!  A fruit smoothy operation for the child of a (get this) financial advisor, who had just graduated from college.  All in, it was about $250,000, which penciled out to about $5.00 a smoothie for break-even.  I left that particular bank well before they had begun operation (and in part because I thought my boss had lost his mind), but I do know that the FA is still trucking, and that particular son is now his father's employee.

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: workinhard
Date Posted: Jan/10/2011 at 7:34am
Thanks for the comments guys!


Posted By: RIArules
Date Posted: Jan/20/2011 at 12:21pm
This may influence your decision, FML!!:
 
http://www.financial-planning.com/news/sec-finra-advisor-oversight-2671006-1.html?ET=financialplanning:e2496:2129588a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__012011 - http://www.financial-planning.com/news/sec-finra-advisor-oversight-2671006-1.html?ET=financialplanning:e2496:2129588a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__012011
 


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Moraen
Date Posted: Jan/20/2011 at 12:50pm
This shouldn't bother you until you get to $100 million.  By then it won't matter.  Just keep firing clients to keep it under $100 mil.

Doesn't seem like it affects State RIA's.


Posted By: B24
Date Posted: Jan/20/2011 at 12:52pm

I wonder where the states are on this.



-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: B24
Date Posted: Jan/20/2011 at 12:54pm
Originally posted by Moraen Moraen wrote:

This shouldn't bother you until you get to $100 million.  By then it won't matter.  Just keep firing clients to keep it under $100 mil.

Doesn't seem like it affects State RIA's.
 
I read it that RIA's UNDER 100mm AUM would fall into FINRA's crosshairs, and that 100mm+ firms would stay under SEC.  Am I reading that wrong?  Does this only apply to hybrid firms?
 
It also doesn't mention where the states are on this.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: B24
Date Posted: Jan/20/2011 at 12:56pm
"The SEC currently oversees 11,888 registered investment advisors, according to the report, but it’s shifting oversight of a chunk of them to FINRA. Soon, the SEC will just oversee RIAs with $100 million or more in assets, all 8,538 of them, while those with less will be policed by the self-regulatory organization."

-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: RIArules
Date Posted: Jan/20/2011 at 12:58pm
Originally posted by B24 B24 wrote:

Originally posted by Moraen Moraen wrote:

This shouldn't bother you until you get to $100 million.  By then it won't matter.  Just keep firing clients to keep it under $100 mil.

Doesn't seem like it affects State RIA's.
 
I read it that RIA's UNDER 100mm AUM would fall into FINRA's crosshairs, and that 100mm+ firms would stay under SEC.  Am I reading that wrong?  Does this only apply to hybrid firms?
 
It also doesn't mention where the states are on this.
Yep.  It also mentions a new fee regimen.  Remember, just because we are State registered, it doesn't mean that we don't ultimately fall under SEC supervision, at least the way I remember reading that tidbit several months ago.  I'm pretty sure most states would jump at the chance to punt supervision to a SRO.  At a minimum, it looks like you and I made pretty good decision to go fee only, huh?

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Moraen
Date Posted: Jan/20/2011 at 1:03pm
Hell yeah.  WTF?!

I read it wrong for sure.  Jesus.  I'm calling John up to see where they are on this.  They just added five examiners this year, but with the state deficit, my guess is the Sec. of State here will jump all over it.

Shit.


Posted By: RIArules
Date Posted: Jan/20/2011 at 1:04pm
"FINRA was, of course, delighted by the SEC’s endorsement."
 
I'm sure they are licking their lips.
 
Wet, where the hell are you when we need you?


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: B24
Date Posted: Jan/20/2011 at 1:30pm
Originally posted by RIArules RIArules wrote:

Originally posted by B24 B24 wrote:

Originally posted by Moraen Moraen wrote:

This shouldn't bother you until you get to $100 million.  By then it won't matter.  Just keep firing clients to keep it under $100 mil.

Doesn't seem like it affects State RIA's.
 
I read it that RIA's UNDER 100mm AUM would fall into FINRA's crosshairs, and that 100mm+ firms would stay under SEC.  Am I reading that wrong?  Does this only apply to hybrid firms?
 
It also doesn't mention where the states are on this.
Yep.  It also mentions a new fee regimen.  Remember, just because we are State registered, it doesn't mean that we don't ultimately fall under SEC supervision, at least the way I remember reading that tidbit several months ago.  I'm pretty sure most states would jump at the chance to punt supervision to a SRO.  At a minimum, it looks like you and I made pretty good decision to go fee only, huh?
 
I think you're missing my point.  I'm saying, that as an RIA, unless you have 100mm+ AUM, you would soon fall under the oversight of FINRA.  Not what I want.  I'm perfectly content being tucked in under my state Dept of Banking.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Indyone
Date Posted: Jan/20/2011 at 1:36pm
So, if true, this appears to eliminate one of the main benefits of going the RIA route,m correct?  Will any of you convert to an IAR if this goes through?

-------------
"Independence is like the Berlin Wall. People are only jumping in one direction." - Philip Palaveev - November 2005. "You are never free...unless you are independent..." - Indyone - May 2005.


Posted By: RIArules
Date Posted: Jan/20/2011 at 1:36pm
No, B.  I hear you loud and clear.  FINRA gets its walking orders from those that would love nothing more than to absorb us back into the collective, Borg style.

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Moraen
Date Posted: Jan/20/2011 at 1:40pm
Originally posted by Indyone Indyone wrote:

So, if true, this appears to eliminate one of the main benefits of going the RIA route,m correct?  Will any of you convert to an IAR if this goes through?


It eliminates THE main reason for going RIA.  Do you think FINRA will create another set of rules for us to follow?  No, they'll just port over their bullshit rules from the B/D side and regulate the fuck out of us and probably charge us an arm and a leg to do it.




Posted By: RIArules
Date Posted: Jan/20/2011 at 1:46pm
The comments at the bottom of the article are starting to heat up...

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Indyone
Date Posted: Jan/20/2011 at 2:11pm
From the outside looking in, this pisses ME off.  You guys that have chosen the RIA route have consciously said that you will forgo the commission route to avoid FINRA regulation and now FINRA is going to step in and regulate?!!!  That sucks beyond the pale.  At that point, the only possible reason I can see to stay the course as an RIA is a few extra percentage points in retained fees and even those are partially eaten up by ticket charges.  One has to wonder if this isn't a move to push many RIA's into a B/D association.  If you are regulated by FINRA, but not under a B/D, will FINRA just bill you for services?

-------------
"Independence is like the Berlin Wall. People are only jumping in one direction." - Philip Palaveev - November 2005. "You are never free...unless you are independent..." - Indyone - May 2005.


Posted By: B24
Date Posted: Jan/20/2011 at 3:22pm
I think the SEC is just over-burdened.  Unfortunately, they are a federal agency, and you know how that goes.  FINRA is an SRO, and are basically a for-profit company.  They can just hire more agents, charge more, whatever.  Granted, their own members sit on the Board, but still.
 
The SEC is a joke because they are a typical government beauracratic agency that doesn't have enough resources.  FINRA is a joke because they are a joke.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: B24
Date Posted: Jan/20/2011 at 3:23pm
BTW, it doesn't changte certain things.  I still don't have to answer to a B/D, and have more control over my costs.

-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Moraen
Date Posted: Jan/20/2011 at 3:38pm
Originally posted by B24 B24 wrote:

BTW, it doesn't changte certain things.  I still don't have to answer to a B/D, and have more control over my costs.


Why does it matter if you don't have to answer to a B/D if the result is the same from a "what you can do" standpoint?


Posted By: B24
Date Posted: Jan/20/2011 at 4:05pm
Originally posted by Moraen Moraen wrote:

Originally posted by B24 B24 wrote:

BTW, it doesn't changte certain things.  I still don't have to answer to a B/D, and have more control over my costs.


Why does it matter if you don't have to answer to a B/D if the result is the same from a "what you can do" standpoint?
 
I guess that's true, too.  But I can't imagine FINRA now making every single small RIA firm pass marketing literature by them.  That would just be a distaster for me.  I have built my whole marketing program on social networking, e-mail marketing, etc.  NOt sure what I would do if I had to turn around and get every freakin Tweet approved in advance.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: PWA
Date Posted: Jan/20/2011 at 4:11pm
Originally posted by B24 B24 wrote:

Originally posted by Moraen Moraen wrote:

Originally posted by B24 B24 wrote:

BTW, it doesn't changte certain things.  I still don't have to answer to a B/D, and have more control over my costs.


Why does it matter if you don't have to answer to a B/D if the result is the same from a "what you can do" standpoint?
 
I guess that's true, too.  But I can't imagine FINRA now making every single small RIA firm pass marketing literature by them.  That would just be a distaster for me.  I have built my whole marketing program on social networking, e-mail marketing, etc.  NOt sure what I would do if I had to turn around and get every freakin Tweet approved in advance.


EXACTLY! 

That is one of the biggest, if not the very biggest, advantages of going RIA....not watering down my marketing approach to meet the lowest-common-denominator/shithead advisor. 

I feel like my hands, legs and brain are shackled by my B/D, and it's primarily b/c of FINRA regs.  If they take over for the SEC with RIA's, I imagine the comment above is right....they wouldn't bother creating all new guidelines for RIAs. 


Posted By: Moraen
Date Posted: Jan/20/2011 at 4:21pm
Originally posted by B24 B24 wrote:

Originally posted by Moraen Moraen wrote:

Originally posted by B24 B24 wrote:

BTW, it doesn't changte certain things.  I still don't have to answer to a B/D, and have more control over my costs.


Why does it matter if you don't have to answer to a B/D if the result is the same from a "what you can do" standpoint?
 
I guess that's true, too.  But I can't imagine FINRA now making every single small RIA firm pass marketing literature by them.  That would just be a distaster for me.  I have built my whole marketing program on social networking, e-mail marketing, etc.  NOt sure what I would do if I had to turn around and get every freakin Tweet approved in advance.


That's my point B - every tweet.


Posted By: PWA
Date Posted: Jan/20/2011 at 5:08pm
From a well known (around here) compliance contact: 

Regarding the FINRA thing, the SEC isn't endorsing FINRA overseeing those RIAs; the endorsement was for RIAs that large to just start paying for their own audits (instead of them being free).  Which, in my opinion, is much better than being under FINRA.  

No one I know in the industry thinks the SEC will hand control to FINRA for anything except dually registered entities.

Obviously it's not written in stone, but everyone I've talked to
the last couple days thinks they'll go with the "making you pay for your own
audit."

Trust me, they're well aware how awful FINRA is.




Posted By: Wet_Blanket
Date Posted: Jan/20/2011 at 5:53pm
Sorry guys for my absence.  I think you all are over-reacting/interpreting it wrong.  I actually have the report infront of me that I plan to read tonight.
 
My analysis later.


Posted By: RIArules
Date Posted: Jan/20/2011 at 7:34pm
I was about to pledge a Whataburger with cheese, overnight shipment.

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Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: B24
Date Posted: Jan/20/2011 at 8:42pm
Originally posted by Wet_Blanket Wet_Blanket wrote:

Sorry guys for my absence.  I think you all are over-reacting/interpreting it wrong.  I actually have the report infront of me that I plan to read tonight.
 
My analysis later.


We'll all be waiting by the phone...

Wink


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Debolt
Date Posted: Jan/20/2011 at 9:40pm
Can you respond via podcast. With a ski mask for anonymity of course...

-------------
Check the charts: October 3, 1974 = March 9, 2009   Quit making excuses and sell something!!

Obstacles are those frightful things you see when you take your eyes off your goal. - Henry Ford


Posted By: Wet_Blanket
Date Posted: Jan/20/2011 at 10:09pm
I think the author of the article was way off on their conclusion.
 
#1 - this is a Staff recommendation from the Division of Investment Management - not an endorsement by the SEC.
 
#2 - Its recommendation to Congress is to:
        A. Allow user fees for RIAs (this will solve the funding issue they face and pretty much have the industry partially pay for itself).
 
        B. Create a SRO to oversee RIAs (with SEC Oversite)
            OR
            Give FINRA oversight of dual registrants.
 
#3 - These conclusions are reached based on the expected consequences of the enaction of Title IV (The Private Fund Investment Advisers Registration Act).  So what the SEC is discussing here is what to do AFTER Title IV goes into effect.  For those of you rusty on Title IV, this is the rule that switches SEC Registration from $25MM to $100MM, and requires IAs that were previously exempted to be registered (think Hedge Funds).
 
So, it their recommendations are adopted by Congress, it will NOT affect RIAs with less than $100MM in qualifying AUM.
 
For RIAs with more than $100MM qualifying AUM, you will either have to pay the SEC more fees and have a SRO (possibly FINRA), or pay the SEC more fees and either be regulated directly by the SEC OR (if a dual registrant) be regulated by FINRA with SEC Oversight (like a B/D).
 
That last option actually makes sense.  FINRA already regulates the B/D and I can see the obvious issues that are caused currently because FINRA can pretty much smell fire on the B/D side but can't examine their RIA arm (which is crazy I think).
 
So rest well little ones.  iMo and the RIA boyz will escape FINRA oversight and Indy will continue to be covered by FINRA (now on both sides) and look for reasons to not go RIA.


Posted By: Wet_Blanket
Date Posted: Jan/20/2011 at 10:42pm
And now for my final comment.
 
WHAT THE SEC REALLY WANTS
 
By Wet_Blanket
 
When the SEC became the regulator of Registered Investment Advisers, the only type in existence were the money managers - and specifically they wanted the LARGE ones.  Now after 40 years, the term RIA has evolved to include all sorts of varieties. 
 
The SEC does NOT really want the following:
 
Small RIAs
RIAs that do non-discretionary business (they are non-qualifying AUM)
RIAs that do mutual fund models
RIAs that are Financial Planning
The Ferris of the world
etc. etc.
 
They want to get back to the Money Managers - Investment Managers.


Posted By: B24
Date Posted: Jan/21/2011 at 9:05am
So in other words, small (planning-type) RIA's will most likely continue under the auspices of their state?
 
Thanks for your feedback on this. I think even the "journalists" are over-reaching on this.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: RIArules
Date Posted: Jan/21/2011 at 10:12am
So, do you want bacon and fries with that?  How about a malt shake and a fried apple pie?

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 10:27am
Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by workinhard workinhard wrote:

The whole living expenses thing... just out of curiousity...
 
Couldn't you get a small business loan for start up... and include a salary for yourself for a year?  I'm not saying you SHOULD, but hypothetically, isn't that doable?
Startup loans are almost non existant for businesses that have been in business for less than 3 years.
If he can get an SBA guaranty specialist to give him the time of day, not really...
Edit: Just as a point of reference, I cut my teeth as a credit analyst for small business loans for leasing equipment.
 
I didn't see this before.
 
My wife just opened her own OT Clinic. When we were discussing funding options I immediately went into 'never use your own funds' mode and we began looking at loans. Bear in mind from a credit perspective we're not a credit risk. Scores are excellent, reserves are excellent, and her work experience in the exact same field is excellent.
 
However, what was a slam dunk deal 3 years ago for a start up is now a dead deal. Even the SBA is clamped up. The banks that are insuring loans through the SBA for start ups want the following:
 
50% 'down' on the loan. 3 years of audited financials (pro forma financials wasn't even an option). The crazy thing (and the one I had several odd discussions with the banks about) was that I know the SBA guarantees 75% of the loan amount. The maximum at risk the bank has is 25% of the loan amount, but they want 50% equity and won't loan on working capital. The banks are so risk averse that they don't loan on these EVEN WITH the SBA program and 49% equity.
 
In the end we just used our own money, but in a normal credit cycle wouldn't. We'll just get a loan in a couple of years and replenish our capital that way, but it's just a comment on the current lending environment.


Posted By: RIArules
Date Posted: Jan/21/2011 at 10:46am
It has been a while, but SBA used to guaranty 90% up to +/-$150K, and I had heard that Obama and Congress had drastically reduced the underwriting standards as part of the recovery legislation.  You were in the service at one point, no?  Check out the Patriot Express program, it is probably alot more flexible than what you saw.
 
I would be willing to put a package together for my normal hourly fee Big smile...  But it won't be worth its weight in toilet paper unless you have a lender willing to make the loan.


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 11:09am
I've been in the credit underwriting business before. I would probably have to charge you RIA Smile.
 
All kidding aside, the u/w standards used to be far less rigorous than they are now. It's no wonder credit has frozen up on the business side. In the end we could have gotten a loan had we wanted to put more money down or wanted to fight it out with more idiot loan officers. The point I was making is that, unless you've been directly involved in a loan process recently, you'd likely be very surprised at the moronic standards they have now.
 
It was one thing when they used the 'does he have a pulse' u/w standard, but now the pendulum has swung so far the other way it's insane.


Posted By: RIArules
Date Posted: Jan/21/2011 at 11:20am
Another comment regarding "never use your own funds" mantra, especially with SBA stuff.  You are still personally on the hook for the loan, and if the bank has to be made whole via the SBA guarantee, then the government will own the loan and will still have all the rights of the original lender (and possibly more traction in collection).  So basically, unless you are willing to file bankruptcy to discharge the debt, they will get this money back from you. 

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 11:22am
It's not a function of not have culpability for the loan. It's about leverage. I don't care about being on the hook, I want to deploy my funds for a purpose that I cannot get a loan for and use loans for a purpose that I can get a loan for.


Posted By: RIArules
Date Posted: Jan/21/2011 at 11:24am
Ahhh.  The Donald Trump method.

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 11:29am
Originally posted by RIArules RIArules wrote:

Ahhh.  The Donald Trump method.
Or what is more commonly known as Sound Business Finance. Lever up when it's cheap to do so, de lever when it's expensive.


Posted By: B24
Date Posted: Jan/21/2011 at 11:33am
I tried to get an SBA loan for my RIA startup, as I was looking at doing some out-of-the-box stuff.  Basically, they wouldn't fund working capital, they wouldn't fund salaries, they would CONSIDER funding rent.  But everything was funded in arrears based on on actual receipts (or purchase orders), and it had to be for physical assets.
 
So how the hell does a service business get a loan??!  Sure, I could have gotten a loan for maybe 10-15K at most to cover hard assets I bought, but that was pointless.  So I just self-funded, which is fine as well, it just kind of handcuffs you.


-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Guests
Date Posted: Jan/21/2011 at 11:36am
Preciesely my point. Start ups can get very little funding right now. It's not until 3 years out that you can start to get funding.
 
I'm fine with tightened lending standards, but the credit has gotten TOO TIGHT.


Posted By: RIArules
Date Posted: Jan/21/2011 at 11:41am

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Moraen
Date Posted: Jan/21/2011 at 11:47am
I looked at getting an SBA loan when I opened. Keep in mind. I was applying for a Patriot Express loan as a Combat Veteran. my wife and I have excellent credit, I had a history of good production. Turned down flat. That is how tight credit was in 2008. We ended up using credit cards we had with 0% intro rates and paid them off in twelve months.


Posted By: RIArules
Date Posted: Jan/21/2011 at 12:11pm
That sucks Mo.  Even in normal lending conditions, its hard to find a lender willing to mess around with an SBA guaranteed loan.  A bunch either just will not do them or have no interest in learning how.  Don't get too down on the lenders, at one point in 2008 I had more examiners than employees in our main office, and as soon as one would leave my office, another one would be in it.  I thought of setting up a "take a number" dispenser. 

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 12:15pm

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization). Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (which is quite low by the business plan) my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.


Posted By: Moraen
Date Posted: Jan/21/2011 at 12:18pm
Holy shit LSU, you are the Ron14 of credit threads.


Posted By: Guests
Date Posted: Jan/21/2011 at 12:25pm

No, his answer (to RIA's question about explain to me how you think X is cheap...) would have been.

FU, it just is, watch the damn game you idiot.


Posted By: B24
Date Posted: Jan/21/2011 at 1:05pm
I was a corporate controller/finance director in the real estate/hotel industry for years.  There was not even one single time that a piece of property was ever bought for cash.  50% leverage was about the LEAST amount of leverage I ever saw.  And I was involved in/witness to literally hundreds of deals.  Unless it is a pure spec/turnaround play, it's virtually impossible to make money (a return anywhere near compensating you for the risk or opportunity cost of your capital) in real estate without leverage.  That is the beauty of leverage, and why hard real estate generally trumps buying REITS with cash.

-------------
"If Bellicheat pulls that rabbit out of his a$$ with this kid at quarterback, I'll personally kiss his ring." - Sporsfreak, 09/20/16

"Jags/Vikes Super Bowl. Write it down" - Sportsfreak 01/19/18


Posted By: Guests
Date Posted: Jan/21/2011 at 1:12pm
+1
Leverage is some sort of dirty word nowadays when it shouldn't be.


Posted By: RIArules
Date Posted: Jan/21/2011 at 2:06pm
Originally posted by B24 B24 wrote:

I was a corporate controller/finance director in the real estate/hotel industry for years.  There was not even one single time that a piece of property was ever bought for cash.  50% leverage was about the LEAST amount of leverage I ever saw.  And I was involved in/witness to literally hundreds of deals.  Unless it is a pure spec/turnaround play, it's virtually impossible to make money (a return anywhere near compensating you for the risk or opportunity cost of your capital) in real estate without leverage.  That is the beauty of leverage, and why hard real estate generally trumps buying REITS with cash.
Were we talking about real estate? 

-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: RIArules
Date Posted: Jan/21/2011 at 2:53pm
Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation) Boy, that worked out well over the last 5 years (snort). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization).Which lender do you know of (even before the credit crisis) that was willing to amortize a rental property loan for 30 years.  15, POSSIBLY 20, but 30???  And there is a risk associated with balloons that no-one took into account, but I digress.  Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1. Until you have a combination of vacancy/delinquency of > 40%.  Then your ass is in a crack, because you plunked your entire $100K into maximizing your investment, and set aside no reserve.  And this doesn't even take into account taxes, insurance, reserves for replacement and/or repairs, which would further reduce your cash flow and coverage ratio, making your margin of error even thinner.  Are you going to manage these properties, or will you be paying for that too?   There is a reason that you can't margin rental property at 90% (or if you did, it would be completely imprudent).  If you need the numbers for a true world scenario, I will be more than happy to oblige, but it will have to wait until I have some time and access to my 12B.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).  Ha!  More like 5 years tops conventional bank debt, 7 max SBA, but lets not quibble.
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (This business has no expenses?  No problem, I'll let that slide) (which is quite low by the business plan) Which is an educated guess, as oposed to the monthly bank nut, which is set in stone.  In my experience it is just as likely that you will experience negative cash flow, at least in the first couple of years. my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.  Unitl you hit the real world.  Say your wife leaves you for the cabana boy, or decides she doesn't want to do it anymore.  Maybe the Feds cut reimbursement for OT.  You have to remember, in this scenario, you are offsetting your loan with an essentially worthless asset.
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.
 
LSU, don't throw out all that textbook scenario tripe.  I think we all know the principals of IRR, cash on cash, etc (at least I think we all do LOL).  I am not against prudent leverage, but you act as if there are no risks in the real world. 


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 3:15pm
Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation) Boy, that worked out well over the last 5 years (snort). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization).Which lender do you know of (even before the credit crisis) that was willing to amortize a rental property loan for 30 years.  15, POSSIBLY 20, but 30???  And there is a risk associated with balloons that no-one took into account, but I digress.  Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1. Until you have a combination of vacancy/delinquency of > 40%.  Then your ass is in a crack, because you plunked your entire $100K into maximizing your investment, and set aside no reserve.  And this doesn't even take into account taxes, insurance, reserves for replacement and/or repairs, which would further reduce your cash flow and coverage ratio, making your margin of error even thinner.  Are you going to manage these properties, or will you be paying for that too?   There is a reason that you can't margin rental property at 90% (or if you did, it would be completely imprudent).  If you need the numbers for a true world scenario, I will be more than happy to oblige, but it will have to wait until I have some time and access to my 12B.
 
I have plenty of real world numbers. I currently own 3 said rental properties in the DFW metroplex. All of them bought with 30 amortization non-owner occupied loans. BTW Fannie allowed 10 such properties and the 30 year financing still occurs on the A paper conforming loan side for Non-owner occupied. You can still, to this very day, buy rental property for 10% down and margin it up 90%. I'm not sure where you get your numbers but if you want, I'll be happy to send you some information on normal, everyday conforming Fannie/Freddie loans.
 
As for real world numbers, whether you use leverage or do not use leverage those expenses are constant. Leverage does not increase your risk. What leverage does is require your numbers to be more exact. The margin of error for you numbers decreases as you lever up. However, using your example the Leverage actually REDUCED my risk. You see, if I paid cash for the house and the house was vacant I now STILL have the risk of repairs but no cash to accomodate that. By leveraging up my asset base I've spread that risk over 10 houses instead of one.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).  Ha!  More like 5 years tops conventional bank debt, 7 max SBA, but lets not quibble.
 
The SBA will loan up to 25 years for property and up to 10 years for working capital under the 7 (a) loan program. Those are the federal guidelines.
 
http:// http://www.sba.gov - www.sba.gov
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (This business has no expenses?  No problem, I'll let that slide) (which is quite low by the business plan) Which is an educated guess, as oposed to the monthly bank nut, which is set in stone.  In my experience it is just as likely that you will experience negative cash flow, at least in the first couple of years. Comments at end of post.my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.  Unitl you hit the real world.  Say your wife leaves you for the cabana boy, or decides she doesn't want to do it anymore.  Maybe the Feds cut reimbursement for OT.  You have to remember, in this scenario, you are offsetting your loan with an essentially worthless asset. Comments at end/
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.
 
LSU, don't throw out all that textbook scenario tripe.  I think we all know the principals of IRR, cash on cash, etc (at least I think we all do LOL).  I am not against prudent leverage, but you act as if there are no risks in the real world. 
I'm not entirely sure you do know the principals of IRR and NPV. Your calculations about the business having no expenses is pretty clear that you don't understand how to calculate IRR. NPV is how much is a future set of cash flows worth in today's dollar. We aren't talking about whether the business is a good business or a bad business. We're talking about what the COSTS of financing said business are.
 
Your comments indicate you really don't know the difference between A) deciding whether to buy something and B) Deciding the best way to PAY for something once you've decided to buy it.


Posted By: RIArules
Date Posted: Jan/21/2011 at 4:17pm
Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation) Boy, that worked out well over the last 5 years (snort). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization).Which lender do you know of (even before the credit crisis) that was willing to amortize a rental property loan for 30 years.  15, POSSIBLY 20, but 30???  And there is a risk associated with balloons that no-one took into account, but I digress.  Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1. Until you have a combination of vacancy/delinquency of > 40%.  Then your ass is in a crack, because you plunked your entire $100K into maximizing your investment, and set aside no reserve.  And this doesn't even take into account taxes, insurance, reserves for replacement and/or repairs, which would further reduce your cash flow and coverage ratio, making your margin of error even thinner.  Are you going to manage these properties, or will you be paying for that too?   There is a reason that you can't margin rental property at 90% (or if you did, it would be completely imprudent).  If you need the numbers for a true world scenario, I will be more than happy to oblige, but it will have to wait until I have some time and access to my 12B.
 
I have plenty of real world numbers. I currently own 3 said rental properties in the DFW metroplex. All of them bought with 30 amortization non-owner occupied loans. BTW Fannie allowed 10 such properties and the 30 year financing still occurs on the A paper conforming loan side for Non-owner occupied.  Interesting, 1-4 family four-plex? You can still, to this very day, buy rental property for 10% down and margin it up 90%. I'm not sure where you get your numbers but if you want, I'll be happy to send you some information on normal, everyday conforming Fannie/Freddie loans.  I never claimed to be a mortgage broker, I used to originate/manage in-house lending programs.  I guess it is possible that Fannie/Freddie would allow up to 10 non-owner occupied homes. Although my gut tells me that there are some second-home shenanigans going on there, I will give you the benefit of the doubt and will not argue.  I do, however find it laughable that you would hold Fannie and Freddie out as the poster children of prudent lending standards.
 
As for real world numbers, whether you use leverage or do not use leverage those expenses are constant. No, they are variable.  Leverage does not increase your risk. What leverage does is require your numbers to be more exact. Whoop!!  Leverage doesn't increase risk?  All my clients are going into 3X ETF funds this afternoon.  The margin of error for you numbers decreases as you lever up. However, using your example the Leverage actually REDUCED my risk. You see, if I paid cash for the house and the house was vacant I now STILL have the risk of repairs but no cash to accomodate that. What about the cash inflow that you don't have to pay the bank?  Or in the case of a really bad problem, a home improvement loan that you would otherwise not be able to get because you have no LTV margin?  By leveraging up my asset base I've spread that risk over 10 houses instead of one.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).  Ha!  More like 5 years tops conventional bank debt, 7 max SBA, but lets not quibble.
 
The SBA will loan up to 25 years for property and up to 10 years for working capital under the 7 (a) loan program. Those are the federal guidelines.  SBA has monkeyed with their website to where the loan grid is not easy to find, but the guideline used to be 5 years tops for working capital, with a typical 7 year amortization for a WC/office equipment blend loan.  The 25 years was for real estate.
 
http:// http://www.sba.gov - www.sba.gov    Nice Link!
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (This business has no expenses?  No problem, I'll let that slide) (which is quite low by the business plan) Which is an educated guess, as oposed to the monthly bank nut, which is set in stone.  In my experience it is just as likely that you will experience negative cash flow, at least in the first couple of years. Comments at end of post.my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.  Unitl you hit the real world.  Say your wife leaves you for the cabana boy, or decides she doesn't want to do it anymore.  Maybe the Feds cut reimbursement for OT.  You have to remember, in this scenario, you are offsetting your loan with an essentially worthless asset. Comments at end/
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.
 
LSU, don't throw out all that textbook scenario tripe.  I think we all know the principals of IRR, cash on cash, etc (at least I think we all do LOL).  I am not against prudent leverage, but you act as if there are no risks in the real world. 
I'm not entirely sure you do know the principals of IRR and NPV. Your calculations about the business having no expenses is pretty clear that you don't understand how to calculate IRR.  Your proposition for a business with revenue and no expenses has me thinking you slept through finance AND accounting.  IRR is calculated off of cash flow.  I can provide a link if you need one. NPV is how much is a future set of cash flows worth in today's dollar. We aren't talking about whether the business is a good business or a bad business. We're talking about what the COSTS of financing said business are.  No, YOU are, within a narrow scope without taking anything else into account.
 
Your comments indicate you really don't know the difference between A) deciding whether to buy something Don't make me laugh and B) Deciding the best way to PAY for something once you've decided to buy it.  Sure, mathematically, as much leverage as possible can often make the most sense.  In practice, you leave yourself open to lose the asset, your entire investment, and possibly your shirt.


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Jan/21/2011 at 5:11pm
Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation) Boy, that worked out well over the last 5 years (snort). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization).Which lender do you know of (even before the credit crisis) that was willing to amortize a rental property loan for 30 years.  15, POSSIBLY 20, but 30???  And there is a risk associated with balloons that no-one took into account, but I digress.  Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1. Until you have a combination of vacancy/delinquency of > 40%.  Then your ass is in a crack, because you plunked your entire $100K into maximizing your investment, and set aside no reserve.  And this doesn't even take into account taxes, insurance, reserves for replacement and/or repairs, which would further reduce your cash flow and coverage ratio, making your margin of error even thinner.  Are you going to manage these properties, or will you be paying for that too?   There is a reason that you can't margin rental property at 90% (or if you did, it would be completely imprudent).  If you need the numbers for a true world scenario, I will be more than happy to oblige, but it will have to wait until I have some time and access to my 12B.
 
I have plenty of real world numbers. I currently own 3 said rental properties in the DFW metroplex. All of them bought with 30 amortization non-owner occupied loans. BTW Fannie allowed 10 such properties and the 30 year financing still occurs on the A paper conforming loan side for Non-owner occupied.  Interesting, 1-4 family four-plex? No, SFR.You can still, to this very day, buy rental property for 10% down and margin it up 90%. I'm not sure where you get your numbers but if you want, I'll be happy to send you some information on normal, everyday conforming Fannie/Freddie loans.  I never claimed to be a mortgage broker, I used to originate/manage in-house lending programs.  I guess it is possible that Fannie/Freddie would allow up to 10 non-owner occupied homes. Although my gut tells me that there are some second-home shenanigans going on there How would non owner occupied have anything to do with second home shenanigans? Non Owner occupied is Specifically NOT for second homes, as those are considered a different risk class and owner occupied., I will give you the benefit of the doubt and will not argue.  I do, however find it laughable that you would hold Fannie and Freddie out as the poster children of prudent lending standards.
 
As for real world numbers, whether you use leverage or do not use leverage those expenses are constant. No, they are variable.By constang I mean they are independent of the financing options. A broken A/C unit has zero correlation to whether you paid cash or financed.  Leverage does not increase your risk. What leverage does is require your numbers to be more exact. Whoop!!  Leverage doesn't increase risk?  All my clients are going into 3X ETF funds this afternoon. No, leverage does not increase risk. Whether I pay cash for a business or finance the business has no bearing on if the business will have revenues or not. The risk is 100% about the certainty of your business numbers. If you overstate revenue projections your business will fail. All leverage does is require your numbers to be more precise. Leverage isn't the risk, uncertainty in your projections is the risk. And your clients buying a 3x ETF is exactly that point. The degree of certainty they have in the movement of the underlying index is what causes the risk, not the 3x OF THAT MOVEMENT.   The margin of error for you numbers decreases as you lever up. However, using your example the Leverage actually REDUCED my risk. You see, if I paid cash for the house and the house was vacant I now STILL have the risk of repairs but no cash to accomodate that. What about the cash inflow that you don't have to pay the bank?  Or in the case of a really bad problem, a home improvement loan that you would otherwise not be able to get because you have no LTV margin? So, if I paid cash for the house would I have had MORE cash to pay the bank the mortgage payment? Using up capital in lieu of leverage causes this risk to AMPLIFY. As for the Home Improvement Loan, if you leveraged up from the get go, you now can pay CASH for the home improvement. The bottom line is that the leverage reduced the risk .  By leveraging up my asset base I've spread that risk over 10 houses instead of one.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).  Ha!  More like 5 years tops conventional bank debt, 7 max SBA, but lets not quibble.
 
The SBA will loan up to 25 years for property and up to 10 years for working capital under the 7 (a) loan program. Those are the federal guidelines.  SBA has monkeyed with their website to where the loan grid is not easy to find, but the guideline used to be 5 years tops for working capital, with a typical 7 year amortization for a WC/office equipment blend loan.  The 25 years was for real estate. I know it was for real estate, hence the part where I wrote UP TO 25 YEARS FOR PROPERTY.
http:// http://www.sba.gov - www.sba.gov    Nice Link!
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (This business has no expenses?  No problem, I'll let that slide) (which is quite low by the business plan) Which is an educated guess, as oposed to the monthly bank nut, which is set in stone.  In my experience it is just as likely that you will experience negative cash flow, at least in the first couple of years. Comments at end of post.my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.  Unitl you hit the real world.  Say your wife leaves you for the cabana boy, or decides she doesn't want to do it anymore.  Maybe the Feds cut reimbursement for OT.  You have to remember, in this scenario, you are offsetting your loan with an essentially worthless asset. Comments at end/
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.
 
LSU, don't throw out all that textbook scenario tripe.  I think we all know the principals of IRR, cash on cash, etc (at least I think we all do LOL).  I am not against prudent leverage, but you act as if there are no risks in the real world. 
I'm not entirely sure you do know the principals of IRR and NPV. Your calculations about the business having no expenses is pretty clear that you don't understand how to calculate IRR.  Your proposition for a business with revenue and no expenses has me thinking you slept through finance AND accounting.  IRR is calculated off of cash flow. So you think that revenue isn't cash flow? I don't need a link, I think you need a link. Here is the definition of NPV for you "
  1. value of investment project: the value of an investment project found by adding the present value of expected future cash flows and the cost of the initial investment
 
When you break out your trusty financial calculator you'll notice the INITIAL investment is the cost to BUY the project (in this case 100k for the business) and the expected future cash flows from this investment (revenue). Maybe you're confusing NET revenue with GROSS revenue? Re-read my original post, I said revenues of 36k per year for my wife's clinic. Did you think that was GROSS of expenses ? If so, why on earth would you open a clinic with 36k in GROSS revenue per your business plan? 
I can provide a link if you need one. NPV is how much is a future set of cash flows worth in today's dollar. We aren't talking about whether the business is a good business or a bad business. We're talking about what the COSTS of financing said business are.  No, YOU are, within a narrow scope without taking anything else into account.
 
Your comments indicate you really don't know the difference between A) deciding whether to buy something Don't make me laugh and B) Deciding the best way to PAY for something once you've decided to buy it.  Sure, mathematically, as much leverage as possible can often make the most sense.  In practice, you leave yourself open to lose the asset, your entire investment, and possibly your shirt.Absolutely there is a point where leverage becomes excessive. That point is called the uncertainty in your numbers, not the leverage amount. For instance, if you were 100% certain to land on 8 black at the roulette table, there is NO AMOUNT of leverage that would increase your risk. There is NO amount of Leverage that would be excessive. It's the uncertainty in whether you land on 8 black that makes the leverage ratio relevent. It is not the leverage that increases risk.


Posted By: RIArules
Date Posted: Jan/21/2011 at 5:23pm

In order to save space here, and not expound the fight over the definition of "Revenue", "Gross Income", "Net Income" and "Cash Flow", I will lay it out as follows:

1)  You believe that a business plan can be used to project cash flow to a high degree of certainty; and
 
2)   Given that high degree of certainty you should use leverage to the degree that your IRR will exceed your cash on cash return.
 
I am done arguing this, as it has little to contribute to the board.  But.... if you ever decide to get into the loan business again, would you consider being my loan officer??  Party


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Wet_Blanket
Date Posted: Jan/21/2011 at 5:37pm
RIA - I will take all of that and that breakfast wrap they have.
I've met with my consultant today, and he reached the same conclusion as that FP article.  I think he just read the article and not the report himself.  Made me think why I (and by "I" I mean out of my Compliance budget) am paying him.


Posted By: RIArules
Date Posted: Jan/21/2011 at 10:13pm

BREAKFAST WRAP???  Angry



-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Wet_Blanket
Date Posted: Jan/21/2011 at 10:37pm
Wasn't it a toquito or something like that?


Posted By: moneyguy
Date Posted: Jan/24/2011 at 10:15am
I think we need to add more colors to the text options. 
 
Leverage increases risk.  The need to be more accurate with projections is due to this increased risk.  I'm going to work now.


Posted By: RIArules
Date Posted: Jan/28/2011 at 11:00pm
Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Originally posted by LSUAlum LSUAlum wrote:

Originally posted by RIArules RIArules wrote:

Look, we have pranced around this subject before, but leverage comes with its own unique set of risks, particularly for private/small business.  There is a reason that I made exactly 1 SBA guaranteed loan in the last 8 or so years in that biz - if the loan was worth making, it shouldn't require an SBA guarantee.  There were some intriguing options for lenders willing to sell off the guaranteed portions and retain service (much like selling an A share fund, but with some additional incentives from a bank leverage standpoint), but we came to the determination that it was more headache than it was worth.

Now, explain to me why you think that an SBA loan is cheap (2% plus upfront fee, prime plus 2.75% interest), and how are you going to de lever when the floating rate (which 99% of them are) is expensive?

Ok, leverage is cheap unless the interest rate is unsustainable. I'll use real estate as an example since an extreme form of leverage (and of course you used Donald Trump as your tongue in cheek remark Smile).
 
I can buy a house for say 100k. If I am allowed to buy it for 90k in borrowed funds and 10k in my own funds (and lets assume I have 100k as an option to pay cash instead). I can either buy one house or buy 10 (assuming I can maximize my leverage).
 
Even if the return I can get on Cash is LESS THAN the return I can generate with borrowed money in cash flow it's not a bad idea assuming the thing I'm buying has a greater TOTAL return.
 
Example:
 
Scenario A) Buy 10 houses, each with a 3% appreciation in value per year (stricktly inflation) Boy, that worked out well over the last 5 years (snort). Borrowing cost is 7% interest on 100k. Scenario B) Or buy 1 house with 0% borrowing cost. Assume each house rents for 1000 per month.
 
Math:
A) 10 houses = 10,000 per month cash flow = 120k per year cash flow in. Debt Service for 900k loans = 6,000k per month (30 year amortization).Which lender do you know of (even before the credit crisis) that was willing to amortize a rental property loan for 30 years.  15, POSSIBLY 20, but 30???  And there is a risk associated with balloons that no-one took into account, but I digress.  Cash flow from leverage 48k per year. Cash on Cash return = 48% for year 1. Until you have a combination of vacancy/delinquency of > 40%.  Then your ass is in a crack, because you plunked your entire $100K into maximizing your investment, and set aside no reserve.  And this doesn't even take into account taxes, insurance, reserves for replacement and/or repairs, which would further reduce your cash flow and coverage ratio, making your margin of error even thinner.  Are you going to manage these properties, or will you be paying for that too?   There is a reason that you can't margin rental property at 90% (or if you did, it would be completely imprudent).  If you need the numbers for a true world scenario, I will be more than happy to oblige, but it will have to wait until I have some time and access to my 12B.
 
I have plenty of real world numbers. I currently own 3 said rental properties in the DFW metroplex. All of them bought with 30 amortization non-owner occupied loans. BTW Fannie allowed 10 such properties and the 30 year financing still occurs on the A paper conforming loan side for Non-owner occupied.  Fannie & Freddie were not formed and/or chartered for that purpose  Interesting, 1-4 family four-plex? No, SFR.You can still, to this very day, buy rental property for 10% down and margin it up 90%. I'm not sure where you get your numbers but if you want, I'll be happy to send you some information on normal, everyday conforming Fannie/Freddie loans.  I never claimed to be a mortgage broker, I used to originate/manage in-house lending programs.  I guess it is possible that Fannie/Freddie would allow up to 10 non-owner occupied homes. Although my gut tells me that there are some second-home shenanigans going on there How would non owner occupied have anything to do with second home shenanigans? Non Owner occupied is Specifically NOT for second homes, as those are considered a different risk class and owner occupied. You obviously have no clue about uncscrupulous mortgage brokers, I will give you the benefit of the doubt and will not argue.  I do, however find it laughable that you would hold Fannie and Freddie out as the poster children of prudent lending standards.
 
As for real world numbers, whether you use leverage or do not use leverage those expenses are constant. No, they are variable.By constang I mean they are independent of the financing options. A broken A/C unit has zero correlation to whether you paid cash or financed.  I would love to see your rental properties in 30 years  Leverage does not increase your risk. What leverage does is require your numbers to be more exact. Whoop!!  Leverage doesn't increase risk?  All my clients are going into 3X ETF funds this afternoon. No, leverage does not increase risk. Whether I pay cash for a business or finance the business has no bearing on if the business will have revenues or not. The risk is 100% about the certainty of your business numbers. If you overstate revenue projections your business will fail. All leverage does is require your numbers to be more precise. Leverage isn't the risk, uncertainty in your projections is the risk. And your clients buying a 3x ETF is exactly that point. The degree of certainty they have in the movement of the underlying index is what causes the risk, not the 3x OF THAT MOVEMENT.   The margin of error for you numbers decreases as you lever up. However, using your example the Leverage actually REDUCED my risk. You see, if I paid cash for the house and the house was vacant I now STILL have the risk of repairs but no cash to accomodate that. What about the cash inflow that you don't have to pay the bank?  Or in the case of a really bad problem, a home improvement loan that you would otherwise not be able to get because you have no LTV margin? So, if I paid cash for the house would I have had MORE cash to pay the bank the mortgage payment? No, there would be NO mortgage payment.  Duh....  Using up capital in lieu of leverage causes this risk to AMPLIFY. As for the Home Improvement Loan, if you leveraged up from the get go, you now can pay CASH for the home improvement. The bottom line is that the leverage reduced the risk .  By leveraging up my asset base I've spread that risk over 10 houses instead of one.
 
B) 1 house = 1000 per month cash flow, 12k per year. Debt Service = 0, Cash from no leverage 12k per year. Cash on Cash return 12%.
 
Leverage increased my return by 4 fold even at a higher interest rate. The only point at which leverage in this case would be a bad idea is if my cash flow from operations decreased to the point where my cash on cash return was less than an unlevered operation.
 
So lets look at the interest rates you provided in your example.
 
Prime = 3.25%, 2% upfront, SBA rate P+3%(rounded up for simplicity). Assume again a 100k total investment needed. At 10% down (your example numbers) I'd have 10k in the business and 90k debt. Lets just say we're using a 10 year amortization (typical amort schedule).  Ha!  More like 5 years tops conventional bank debt, 7 max SBA, but lets not quibble.
 
The SBA will loan up to 25 years for property and up to 10 years for working capital under the 7 (a) loan program. Those are the federal guidelines.  SBA has monkeyed with their website to where the loan grid is not easy to find, but the guideline used to be 5 years tops for working capital, with a typical 7 year amortization for a WC/office equipment blend loan.  The 25 years was for real estate. I know it was for real estate, hence the part where I wrote UP TO 25 YEARS FOR PROPERTY.
http:// http://www.sba.gov - www.sba.gov    Nice Link!
 
Math:
90k debt service at 6.25% (10 year Am schedule) = 1012 per month or 12144. I have 12k in the transaction (2% upfront fee not rolled in and 90% LTV). Assuming the business generates at least 36k per year in revenues (This business has no expenses?  No problem, I'll let that slide) (which is quite low by the business plan) Which is an educated guess, as oposed to the monthly bank nut, which is set in stone.  In my experience it is just as likely that you will experience negative cash flow, at least in the first couple of years. Comments at end of post.my IRR is still 27%. It pays to leverage up when your IRR is that much  higher than the Cost of Funds. The NPV using those calculations assuming the required discount rate of 6.25% (the cost of funds) then the NPV of 90k at these rates is 85k.
 
So, As long as the loan is over 85k using these numbers it's SOUND BUSINESS FINANCE to lever up.  Unitl you hit the real world.  Say your wife leaves you for the cabana boy, or decides she doesn't want to do it anymore.  Maybe the Feds cut reimbursement for OT.  You have to remember, in this scenario, you are offsetting your loan with an essentially worthless asset. Comments at end/
 
The leverage risk just means your numbers you use has to have less wiggle room, not that the leverage itself presents more inherent challenge.
 
LSU, don't throw out all that textbook scenario tripe.  I think we all know the principals of IRR, cash on cash, etc (at least I think we all do LOL).  I am not against prudent leverage, but you act as if there are no risks in the real world. 
I'm not entirely sure you do know the principals of IRR and NPV. Your calculations about the business having no expenses is pretty clear that you don't understand how to calculate IRR.  Your proposition for a business with revenue and no expenses has me thinking you slept through finance AND accounting.  IRR is calculated off of cash flow. So you think that revenue isn't cash flow? I don't need a link, I think you need a link. Here is the definition of NPV for you "
  1. value of investment project: the value of an investment project found by adding the present value of expected future cash flows Look at these LAST TWO WORDS THAT YOU QUOTED TO REFUTE ME and the cost of the initial investment
 
When you break out your trusty financial calculator you'll notice the INITIAL investment is the cost to BUY the project (in this case 100k for the business) and the expected future cash flows from this investment (revenue). Maybe you're confusing NET revenue with GROSS revenue? Re-read my original post, I said revenues of 36k per year for my wife's clinic. Did you think that was GROSS of expenses ? If so, why on earth would you open a clinic with 36k in GROSS revenue per your business plan? 
I can provide a link if you need one. NPV is how much is a future set of cash flows worth in today's dollar. We aren't talking about whether the business is a good business or a bad business. We're talking about what the COSTS of financing said business are.  No, YOU are, within a narrow scope without taking anything else into account.
 
Your comments indicate you really don't know the difference between A) deciding whether to buy something Don't make me laugh and B) Deciding the best way to PAY for something once you've decided to buy it.  Sure, mathematically, as much leverage as possible can often make the most sense.  In practice, you leave yourself open to lose the asset, your entire investment, and possibly your shirt.Absolutely there is a point where leverage becomes excessive. That point is called the uncertainty in your numbers, not the leverage amount. For instance, if you were 100% certain to land on 8 black at the roulette table, there is NO AMOUNT of leverage that would increase your risk. There is NO amount of Leverage that would be excessive. It's the uncertainty in whether you land on 8 black that makes the leverage ratio relevent. It is not the leverage that increases risk.
 
I have a feeling this is a bad idea.  I had buried the hatchet, but I couldn't help myself. 


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: RIArules
Date Posted: Feb/01/2011 at 5:19pm
Back to what we were talking about before:
 
http://www.fa-mag.com/fa-news/6767-ketchum-no-need-to-fear-finra-as-advisory-sro.html - http://www.fa-mag.com/fa-news/6767-ketchum-no-need-to-fear-finra-as-advisory-sro.html


-------------
Wash Your Hands and say your prayers, because Jesus and Germs are Everywhere


Posted By: Guests
Date Posted: Feb/01/2011 at 6:07pm
ROFL @ RIAs if that happens.
 
Sorry guys, but that would really suck for you.


Posted By: Guests
Date Posted: Feb/01/2011 at 6:25pm
The consipiracy theorist in me says the Wirehouses are using this as a way to force RIA's under the same regulations as they are. This seems to play into the wirehouse hands.


Posted By: Moraen
Date Posted: Feb/01/2011 at 6:36pm
As I said, I am on my way out of the IA business.  Who the fuck wants to deal these jacktards?



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