How does an Investment Firm get Investment Money?

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Disclaimer: As an Investment Technologist, I do not claim to be an expert in marketing. The following article is based on my observation while working for various investment firms.

An investment firm can source their clients from 3 main groups of people or organisation. It can find customer from institutional investor, individual retail investor and wealthy individual / family.

Wealthy Individual or Family

This is not a major venue for securing clients; however, some new or smaller investment firms welcome wealthy individual or family with a minimum investment amount of USD5 million. For larger investment firm, they may require the client to commit a minimum of USD100 million for investment. They would encourage their prospective client to invest in mutual fund for smaller investment commitment.

The only way to secure wealthy individual and family as client is through personal networking. Alternatively, the investment firm’s marketer can establish business relationship with private bankers. Although most wealthy individual trade through private bankers and private bankers also provides investment advisory; some wealthy clients may ask their private bankers to recommend them reliable investment firms and leave the management of money solely to the investment firm.

Retail Investor

An investment firm can setup a mutual fund and collect investment money from individual investors. It is very hard for small investment firm or new investment firm to attract retail investor without a proven track record and substantial investment fund. It requires a lot of resources to setup a mutual fund that conforms to the financial regulation. Therefore, only mid size or larger investment firms could afford to set up a mutual fund. Besides legal fees, the investment firm also needs to invest in  large sum of advertising dollars to attract investment from the public. The risk is high if the mutual fund fails to attract enough investment.

Institutional Investor

This is the main venue for most investment marketers to secure clients. Institutional investors includes pension fund, foundations, charity, trust fund, insurance company, sovereign investment arm or treasury department of a country, treasuries from society, trade associations, religious organisation and corporations that have a large cash reserves.

An investment firm’s marketer needs to establish relationship with these organisations through networking. Alternatively, the marketer can scan through trade journals or the websites of these organisations to look for investment opportunities. Some organisations will routinely post their investment requirement and request any investment firms to submit an investment proposal for their review.

Alternatively, the marketer can establish business relationship with reputable investment consulting firm. Some institutional investor would hire an investment consultant to help them to formulate investment strategy and evaluate investment firm. If an investment consultant like your investment approach, he/she would recommend you to many prospective clients.

A new investment firm without a proven track record would invest with their own money and money from wealthy individuals. Once a track record has been established, it is easier for them to secure clients from the institutional investors. Once the investment firm grows to a certain size, then it would proceed to seek investment money from the public. By then, they would recommend their wealthy individual clients to invest in mutual fund. Once an investment firm grows to a certain size, it is not cost effective to manage funds that are less than USD50 million.

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