Getting started with licensing
Once you have successfully passed the seed-funding stage it will be time to start thinking about the whole question of getting licensed to manage 3rd party funds.
Most traders starting out will be possibly running MAMs or PAMMs with friends and family, or running copying services to retail clients. Trade copying is still a grey area with many regulators but it’s only a matter of time imho before all brokers are forced to insist that trade copying services fall under a license. I’m not sure what this regulation will look like in all jurisdictions but I do know that getting an MDA (managed discretionary account) license for retail customers is very difficult indeed.
So as you grow your business, I believe you will be better off to aim squarely at the better regulated and more secure wholesale or institutional market. The investors are bigger and traders will avoid the temptation of the soft-dollar payments, which present such a huge conflict of interest in the retail space.
Obviously each jurisdiction has slightly different approaches but the theory is pretty much the same. For example:
- Commodity Trading Advisor (CTA) is a relatively low-bar entry into the regulatory environment. Authorised under the US National Futures Association this shows that a trader is serious about establishing a credible funds management business.
- Corporate Authorised Representative (CAR) is an Australian term under an AFSL which allows the representative to operate under the license holder’s terms. This is an easy way to get started and they are relatively common for wholesale customers. The usual cost is around $2k-$3k per month depending on the work and risk to the license holder.
- Contract in with an existing funds manager and bring all of your customers under their umbrella. You will have to give up some portion of your fees but in return you get full reg cover + the fund managers CapIntro services.
- Get your own license. Not easy and quite expensive. Will depend on your background to a certain degree. For most developing traders, the cost and hassle are simply not worth it in the early stages of a career. Start with 1 of the first 3 steps.