A Fund of Your Own

Of course, launching your own mutual fund isn’t for every advisor. Yet, even if you don’t have an up and coming Ben Graham on staff like Steve Rog?(C), the strategy can make a lot of sense: You’re probably already picking and tracking mutual funds, so there isn’t much of a management burden. And chances are, you also have plenty of clients would benefit just as much from a conservatively managed fund of funds as from a more labor intensive “individualized” portfolio.

Still, launching and running your own mutual fund does raise some issues that need to be carefully considered. Rog?(C) spent a long time thinking about the management fees, and the potential conflicts of interest they could create. He finally decided to cap fund expenses at 199 basis points, including the expense ratios of the funds it owns. (Rog?(C) believes that as the fund grows its assets that expenses will fall to 149 bps at around the $50 million mark.) He reasoned that the mutual funds in his wealth management portfolios had the same or similar underlying fund and brokerage expenses, and he charges a 1% fee on top of that. So, if he set his fund advisory fees at the same level, he’d have no economic incentive to recommend one over the other. “We wanted to make sure we had no economic incentive to recommend one service or another to our clients,” he says. “So we just charge the same fee inside or outside the fund.”

While ethically fair, capping expenses at the outset means that the firm is going to have to eat some costs until the fledgling fund has enough assets to pay its own way. Rog?(C) says the breakeven point is around $15 million. Seeded with about $2 million of his own, family and employee money, in 21?,,2 years, Rog?(C) Partners Fund has grown to $17.5 million, finally putting it in the black.

In addition to paying over $100,000 in start-up costs, there are also costs to putting the fund on custodian platforms. Schwab and TD Ameritrade were cooperative in adding Rog?(C) Partners Fund to their platforms, because the firm had assets at both custodians. The fund is on the Pershing and Scottrade platforms as well.

Could You Fire Yourself?

Perhaps the biggest issue for Rog?(C) and any advisor with their own fund is evaluating their own performance. Again, for advisors who are already managing client portfolios of mutual funds, this is just another facet of an issue they already face. But as investment companies, mutual funds do have stricter regulations. So far, Rog?(C) Partners has been blessed with good returns, but they have the added wrinkle of Steve Rog?(C)’s stock picking. What if performance isn’t so good? What if Steve’s picks start to drag fund returns down? “We realize,” says Rog?(C), “that we need to have the courage to fire ourselves.”

To help in the intestinal fortitude department, Rog?(C) Partners has a board of trustees comprised of a client, an independent advisor, a fund industry luminary, and outside legal counsel, who represent the fund’s shareholders, not Rog?(C) & Co.

While that provides Rog?(C) with some guidance and comfort, it’s also a level of accountability that independent advisors aren’t used to. “Every year, the board has to decide whether to rehire us as the fund manager,” says Rog?(C). “While that might seem like a formality, we treat it seriously.”

For most advisors, the cost, the conflicts, and the outside oversight of a mutual fund will be more than they want to take on. Still, the idea of a fund managed for small clients, and with low minimums, strikes me as an attractive solution for those clients you can’t live with, but just can’t fire. Perhaps opening a fund like Rog?(C) Partners to other advisors would be a viable alternative. In that case I’d suggest he cut his fee down from 199 bps to 149 bps, leaving room for other advisors to collect 0.5% on their smaller clients. But that might require creating a new fund, with a whole new set of expenses, which may not be worth it for a mid-size advisor like Rog?(C). Seems like such a good idea, though, that sooner rather or later, someone will offer such a fund, and collect a pretty good amount of assets while helping advisors and their smaller clients.

The other aspect of Rog?(C)’s fund strategy that struck me was the reception that his new fund got from his larger clients. In today’s environment, with increased competition, and armies of brokers masquerading as fee-only fiduciaries, professional financial advisors increasingly have to find creative ways to differentiate themselves. Creating their own mutual funds, or other pools of assets, that collectively offer clients some economies of scale and access to investment opportunities that are unavailable to their individual portfolios just may be a way to do that. Seems like the kind of win/win that independent advice is all about.

Bob Clark, former editor of this magazine, surveys the advisory landscape from his home in Santa Fe, New Mexico. He can be reached at [email protected].