It’s no secret that with overhead, compliance, and professional costs rising, advisory practice margins are being squeezed like never before. Neither is there any mystery about the solution that many consultants recommend today: jettison your unprofitable clients. Of course, in many cases that amounts to more than 50% of an advisor’s client base, which can be a problem for client-oriented, rather than business-oriented advisors. Not only are those “outgrown clients” likely to be long-term clients, many of those “marginal” clients are typically relatives and friends of much wealthier clients who were taken on as favors, and cutting them loose is really not an option.
How then is one supposed to improve eroding practice economics while keeping all current clients on board? My friend Ron Rog?(C) in Bohemia, New York, has been wrestling with this issue for at least the past 10 years. He’s tried newsletters, model portfolios, and limited service offerings, all in an attempt to reduce the cost of servicing the smaller clients in his and other practices. A few years ago, he adopted a more radical strategy, which seems to have provided the solution for his practice, and may help yours as well. He launched his own mutual fund.
Like many good ideas, Rog?(C) literally stumbled on this one. Back in the ’90s, he read a Barron’s interview with the great Ralph Wanger, founder of the Acorn Fund. Wanger mentioned that he had originally been an investment advisor and started his legendary mutual fund as a courtesy for relatives of his wealthy clients. Hmmm, thought Rog?(C), “a mutual fund for smaller clients…” But the cost of launching a fund is considerable, so he mentally filed the idea until he felt his practice could afford it.
A Low-Minimum Option
About four years ago, when Rog?(C)’s son Steve joined the business full time, after earning his bachelor’s degree in finance and economics, he felt it was time to seriously consider the fund idea. “So, we started kicking around ways to make it work,” he remembers. When Rog?(C) says “we,” he’s not talking about the kind of brain trusts found at some largest firms today. With $250 million under management, R.W. Rog?(C) & Co. is family owned, with Ron and his 26-year-old son, Steve, working as co-portfolio managers in the firm along with two CFPs, a portfolio operations manager, a paraplanner, and five support staff.
What “they” came up with is the Rog?(C) Partners Fund, which will be three years old on October 1. He describes it as “mostly a fund of funds,” with a $5,000 minimum investment ($2,500 for IRAs). What that means in practical terms is that 70% of fund assets are invested in mutual funds, hedge funds, or private equity partnerships managed by R.W. Rog?(C) & Co., Inc. As co-portfolio managers for the fund, Rog?(C) and Steve divide responsibilities so that each can focus on their core strengths, then they collaborate and make decisions on security selection together. So with his economics background, Rog?(C) focuses on generating ideas and allocation strategy based on the global economy, while Steve handles value opportunities and indvidual security research. Steve’s stock selections represent about 30% of the fund.
Client assets are being managed by a 26 year-old? Sounds like the kind of nightmare that gives independent advisors a bad name. “Steve’s age can put people off,” admits Rog?(C). “That is, until they talk to him. Then they realize when it comes to investing, he can go toe to toe with anybody. We like to say that Steve is a 26-year-old with 14 years of experience, because he literally grew up working part-time in the ofice asking lots of questions about the business.”
Father’s pride perhaps, but Steve Rog?(C) has the chops to back it up. He’s been in the top 100 stock pickers in the prestigious Meritocracy Fund online challenge many times, and he was recently elected chairman of the Ben Graham Value Investing Committee of the New York Society of Securities Analysts. Oh, and last year, Rog?(C) Partners Fund (ROGEX) was named one of the Wall Street Journal/Lipper’s Category Kings for Multi-Cap Core Equity Funds for the previous 12 month performance (as of 9/30/06), based in no small part on Steve’s stock picks.
In fact, Steve’s contribution helped Rog?(C) Partners Fund to outperform Rog?(C) & Co.’s wealth management portfolios, which hold similar mutual funds, but not individual stocks. To rectify that situation, at the end of this month, they’ll be launching another fund, Rog?(C) Select Opportunities, which will be focused on 20 to 40 stocks and made available to the firm’s wealth management clients.
“The new fund isn’t for everyone,” says Rog?(C). “But we ran the idea by some of our largest clients, including several high-earners on Wall Street, and every one told us to do it. In fact, one guy said he had another $300,000 to give us but thought maybe he should wait to put it in the new fund.”