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CFO Considerations for Onboarding New Investors

Mar 14, 2022

When investment advisors or asset managers onboard new clients, chief financial officers (“CFOs”) have an important role to play in the process by making sure the firm understands the true financial impact of onboarding each investor (or starting a new fund) and ensuring the firm is generating a profit.

This article will discuss a few things CFOs should consider when assessing a firm’s existing clients and before accepting new ones.


The easy starting place is fees; these must be appropriate. If not charging an investor the standard fee rate, it is important to ensure any discount isn’t more generous than can be afforded.


It’s important to analyze the profitability of each client. One component is the annual fee income earned: an asset-based fee typically, and perhaps also an incentive-based fee, allocation or carried interest inside a fund.

The other component is the cost of servicing the client. This includes many costs that are fairly fixed in nature such as rent, salaries, insurance and office-related overhead. There are also somewhat variable costs including portfolio management, research, deal flow, compliance, brokerage and deal expenses, travel, software, lines of credit financing, assets under management (“AUM”)-based fund administration fees, and corporate services such as directors’ costs or filing fees.

The following is often helpful to a CFO:

  • Classify all clients across five or even ten buckets based on their profile, facts, circumstances and background—categorizing all similar clients into a given bucket.
  • For each bucket and the clients in it, compute the total hours and costs of annual staff time at each experience level required to service it, including all client communication; identify technology, travel and research; and determine all other costs incurred to provide services.
  • Apportion a share of the firm’s true fixed overhead to each bucket.

This process will identify the true cost of bringing on and servicing each bucket, a typical client within it and the actual margin. The CFO should assess if the fee income from each bucket exceeds the costs incurred to service these clients.

Also, compare similar clients and ask whether there is a logical reason why they have been granted different fee arrangements.

Ultimately, this process may identify client relationships that need to be renegotiated or discontinued and if any of the buckets are significantly more or less profitable than others. CFOs might be surprised by the results.

Building a Targeted Client Profile

Based on the above outcomes, CFOs will be able to help firms build target client types and perform a study to numerically quantify:

  • The minimum check size needed to ask for from investors or the minimum amount of capital commitments necessary in a fund.
  • The minimum number of clients needed to be economically viable.
  • How semi-fixed costs rise with each new client or the launch of a new fund and the inflection points (i.e., for hiring each additional team member).
  • When considering launching an offshore feeder fund to an existing structure, the fee income needed from it to outweigh all the costs of operating the fund.
  • Whether there are any other key metrics or indicators to compute from historic data that help better understand client profitability.
  • Whether there is a difference in costs between performing functions internally versus outsourcing them.

This information will make CFOs more informed as they firm talks to current clients and help them know whether to pursue similar prospects.

Wider Considerations

Small Versus Larger Clients – The CFO should understand the firm’s place in the market and the clients it wants to attract. This is a human expertise and intellectual capital business. Less but larger clients might be the best mix. However, a business able to leverage robust technology might be able to happily service a higher number of smaller, fragmented relationships.

Retail Versus Institutional – The CFO should identify the nature of the firm’s prospective clients. If they are typically more retail in nature, these might be less financially sophisticated. An important question is how long a typical client stays with the firm. The CFO must know the firm’s churn ratio and how much it costs to replace a client.

Length of a Client’s Investment to Be Profitable – When factoring in the cost of pursuing a client, along with the marketing and onboarding costs, it is possible to estimate how long a client needs to remain with the firm to be profitable. It is worth communicating to each prospective client that the firm is making an investment in them and convey expectations of the minimum time they need to give to manage their assets.

Some firms work more with institutional grade clients, which may be fewer in number and require a longer courtship period but have a better understanding of the conditions they face as a manager. The CFO should compute how much extra it costs the firm in overhead to operate the robust processes and controls demanded by such investors and the extent to which this impacts the margin on this category of clients.

Performing a Breakeven Analysis

An overall, firmwide breakeven analysis is also a valuable tool, especially for a recently formed or soon to-be-formed business. It’s okay to not break even immediately, but it’s important to know how far into the future that moment will be and whether the owners can support the business until then. The assumed growth rate of AUM and fee rates used in the breakeven model must be realistic and achievable. This process will also quantify the impact of client fee breaks on the ability to make a profit.

In light of the SEC's proposed transparency rules for private fund advisors, the CFO should be proactive and make sure the firm has a comprehensive, accurate list of all side letter deals and special fee arrangements with clients so that this data can be incorporated as necessary into quarterly statements reporting.

Taking on every possible client might not make the most sense for a business. Therefore, the abovementioned considerations will help CFOs determine what really moves the needle and whether each client and new fund launch will be able to generate adequate bottom-line profit for the manager to thrive.

Our Current Issue: Q2 2022

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