Why Go Independent?
Why Go Independent?
By: Andrew Saunders
President, Castle Hill Capital Partners
As marketers of alternative investment strategies and private company opportunities, we’re blessed. We’re in a pocket of the financial markets where people matter, strategies are interesting, allocators are engaged and managers have the potential to deliver uncorrelated and/or outsized returns. However, once established in the alternative investment ecosystem, a successful marketer has but a few options for optimally deploying their skill set. They might:
Join an asset management firm under either a compensation formula or salary/bonus structure
Join a bank in a capital introduction role under salary/bonus structure
Join a large placement firm under salary/bonus structure
Go independent and register with an independent broker-dealer.
Castle Hill supports those who wish to be independent and start their own business. We offer a robust platform of financial, regulatory, and business enablement support for highly motivated, successful and entrepreneurial sales professionals. It is our experience that when you empower the right individuals there is simply no better option than going independent. And while the option looks fantastic on an Excel spreadsheet, it is not for everyone. The decision merits serious consideration before moving forward.
As we enter the New Year, there is a demonstrable increase in the number of conversations with sales professionals who wish to learn more about going independent. As the maxim states, “there is no risk-free trade” and going independent involves trade-offs. Herewith, I’ve outlined the positives and negatives and some questions to provide greater clarity for those who are “independent curious.”
Positives:
Own the Upside: When you raise capital as an independent agent you are paid contractually as a percentage of assets or fees and there is no limit to your upside. Payment is formulaic, not at the discretion of another person or company. There is no ambiguity around discretionary bonuses or salary negotiation. Outside of equity participation in a rock star hedge fund, no firm will match what a moderately successful independent salesperson can earn on their own. Not even close.
A simple thought experiment.
Option A: Raise $100 mln in-house, what would your compensation be?
Option B: Raise $100 mln at 2% of AUM on a private fund - you would earn $2,000,000.
If the delta between option A and B is a 7-figure number-...and compensation is a motivator…then going independent may merit consideration.
Have Upside Flexibility: In addition to the absolute comp, engagements may also be constructed a number of ways that better align both parties and offer even greater upside. If the capital raise is for a private company, it is common to receive warrants, advisor shares, straight equity or a combination thereof. As an independent, you can build a portfolio of “today money” and “tomorrow money” all the while aligning yourself with your investor’s outcomes. This is simply impossible when a salesperson operates at a bank or a fund. Compliance departments and internal governance guidelines will insist that you do not pursue those opportunities.
Have Control: While compensation is important, it is often not the primary reason why proven, successful sales professionals explore entrepreneurship. The leading reason for a salesperson to strike out on their own is simply to seize control over their life. To take agency over their reputation, relationships and process and not put their professional lives in the hands of others. Successful sales professionals have honed their craft, have established networks and adhere to a proven process. They generally do not benefit from layers of bureaucracy, performance reviews or continually addressing mismanaged expectations. It is the flexibility that our most successful reps respond to the most. Want to work at midnight? Want to travel? Want to do business on the golf course? Want to make calls and still coach Little League? Want to live in Portugal? All of this is possible when you control your own business.
Investors First: When you are independent you will provide more value to your allocator clients. With a diverse set of opportunities, you can speak more clearly to a broader set of relationships. We all have established contact with investors that “don’t do equity”, or “don’t do quant”, or “don’t do small funds” etc. This is unfortunate if you are working at a fund that only does…equity, or quant or is a small fund. But when you are independent you can listen, advise and only make relevant introductions when it makes sense for your clients. Relationships are both more meaningful and unconstrained. You are there to add value, not hit a quota.
Anti-Fragile: Nassim Taleb coined the phrase “Anti-fragile” to discuss robust systems instead of those that are brittle or subject to a single risk factor. A key attribute of the independent capital raising model is its anti-fragile nature. When you have a portfolio of opportunities and a network of potential collaborators, you avoid single factor risk in the form of one strategy, one Portfolio Manager or one asset class. When you are independent - you build your own portfolio of opportunities and can stay relevant despite market conditions. Who can predict the next Fed move, who can anticipate the next SVB?...or SBF? Or who can anticipate when the person that hired you is going to retire or move on to the next initiative? When you are independent you can spread risk across a number of different opportunities and avoid months and years of efforts going …poof!...when something happens outside of your control.
Consider the internal marketer who has spent 12 months building a pipeline and hits a drawdown. Three things will happen immediately.
The time you spent building the pipeline was for naught
Any chance of incentive comp or significant bonus just vanished
You will be in a 12-18 month “Time-out” with investors as they re-underwrite and “monitor” you coming out of the drawdown.
So in this scenario - not only is your upside capped, but if you have a drawdown you can be in ‘timeout with investors’ for 12-18 months until returns stabilize. Better to have a diverse range of funds to speak intelligently to, which reduces this risk and increases the odds that you will be in a position to offer a strategy of value to all types of investors.
Intellectual Engagement: A trait among successful salespeople on our platform is an insatiable desire to learn. Whether it is a fund strategy, a new asset class, or an innovative new company - there is no ceiling on one’s ability to learn. You are unconstrained and can build content expertise on your terms. But only if you care. The rate of change of innovation continues to accelerate and opportunities tomorrow are hard to anticipate. Motivated independent reps stay ready and informed to advise and capture opportunities when they arise.
Negatives:
Revenue Visibility: In a world of trade-offs, to own your upside, you own your downside. That’s how it works. Them’s the rules. There is no risk free trade. Often I have conversations with individuals who begrudge a large allocation they facilitated and the commission they would have received if independent…but recoil when faced with a commission-only salary structure. The need for current cash flow is a barrier to entry for many individuals who are “Independent Curious.” Salaries serve an extremely important purpose. If you have bills to pay and current cash flow needs then it may not be the right time to go independent.
Before any individual joins our platform, we have honest conversations on the timeframe to success, the J Curve in our business and what is necessary to be successful. Elements of that plan may include a retainer, service fee or draws against success to help smooth out the J curve. We would want our reps to have a credible 12-18 month plan that aligns with her personal financial situation before launch.
Solitary Endeavor: Salespeople used to working in-house or on a trading floor often find the transition to being an external marketer a bit jarring. It gets quiet quick. There is an esprit de corps that develops working in teams and small groups which is hard to replace by working from one’s living room. It can at times be a lonely endeavor and that requires tremendous discipline. It is one thing to do what the boss wants vs. prioritize, every day, what is best for you and your clients. Being a successful independent marketer requires an understanding of the solitary nature of the business, self-reflection on how an individual will behave and thrive in this environment and an understanding of the generativity required to build a business.
That being said, it is only as lonely as you wish it. Our most successful colleagues work in a web of mutually beneficial relationships - some on our platform - many outside - that are built on trust and mutual respect. It is all signal - no noise. So sure, while it may be nice to talk fantasy sports with Frank from Accounting over lunch in the conference room. But are those conversations leading to closing business and serving your clients?
On the Outside: If holiday lunches, offsites, volunteer outings, and Monday morning meetings are an important part of work…being independent may not be for you. While you will undoubtedly have strong relationships with your asset management clients, make no mistake, you’re on the outside looking in. You are not a member of the team, but rather a service provider hired to perform a function. There is clarity in that relationship, however, it can be a transition for those who are used to being employees. While not impossible, it is unlikely that you will be invited to anyone’s holiday lunch. Make peace with that.
“I want my $2!” One of my favorite movies is Better Off Dead. In the film, a young John Cusak is chased (terrorized?) by a newspaper boy looking for a resolution of an outstanding, $2 debt. As an independent, you need to advocate for yourself, negotiate hard, and in rare instances chase down payment. In our business, it is an occupational hazard and one that independent reps should be prepared for. If you are uncomfortable having tough conversations about money, this may not be for you.
Questions to consider:
I’ve highlighted some high-level considerations. However, everyone brings a unique set of experiences, relationships and personal circumstances to the decision. As it is impossible to anticipate and answer every question, please find some additional questions to ask yourself as you consider the option of striking out on your own.
Personal Reflection:
Are you a self-starter? Do you rise to the expectations of others or yourself?
Do you work when nobody is looking?
Do you enjoy learning? Are you a reader?
What operational infrastructure do you need to be successful? Do you need an office? Do you need proximity to other human beings?
Financial Preparedness:
What is your burn rate?
Do you have healthcare or do you need it?
Business Plan:
How will you source investment opportunities to represent?
What is the nature of your investor relationships? Are they yours or your firm's? How do you prospect?
What is your industry reputation? Will colleagues, clients, and investors endorse you?
Do you have a “lane”? E.g. a specific strategy or asset class that you want to focus on? Do you have investor interest in that lane?
Do you enjoy collaboration or do you wish to go it alone?
About Castle Hill Capital Partners, Inc.
Castle Hill Capital Partners, Inc. is an independent broker-dealer that supports motivated, entrepreneurial registered representatives pursuing their capital-raising endeavors.
The firm was formed on four operating principles:
1. Integrity - Honesty always
2. Accountability - To clients and one another
3. Collaboration - Together is easier and better
4. Control - Be in control of your own life
Our unique collaborative environment supports our independent registered representatives to achieve success, take control over their lives, and best serve their investor and manager clients.
The team at Castle Hill left a major investment bank 10 years ago. It has been an exhilarating and wonderful experience to own our business, operate on our terms, and serve our clients the best way we know how. We think this is one of the best ways for proven sales professionals to operate and stand ready to support their success.