Investment Firms Avoid Merger With Operational Joint Venture
April 27, 2009
In an attempt to build scale while retaining their independence, Roanoke Asset Management and Abner Herrman & Brock have formed a joint venture to share information technology infrastructure and cut operational expenses.
"The joint venture gives us the ability to pare our cost structures," said Howard Abner, chairman of investment advisory Abner Herrman, which has more than $500 million in assets under management. "It's helping us improve profit margins."
Last year, Roanoke Asset Management, an investment adviser with about $200 million in assets, began looking for a way to boost profit margins in a severe bear market. Rather than giving up control through a merger or acquisition, Roanoke struck a deal earlier this year with Abner Herrman that allows both to maintain control over their business.
There are 15,000 registered investment advisers and only the top 100 manage more than $1 billion in assets, according to Aite Group senior analyst Alois Pirker. As smaller RIAs get bigger, said Pirker, they are faced with a choice: continue to grow, probably through an acquisition, or remain a niche firm that is "close to clients and serves them as a very local partner." But the Abner-Roanoke venture represents "a different approach to gaining scale," he said. While the arrangement requires that the partner firms have a great deal of trust in each other, "if they can make it work operationally, it's a great idea. It shows how innovative these people get when it comes to reducing costs."
Office space was the most obvious source of savings. Previously located in midtown Manhattan, Roanoke on March 1 moved across the river to Abner Herrman's office in Jersey City. "Both firms had conference rooms, reception areas, storage areas--we didn't need two sets," said Abner.
Staffing has also been affected. Roanoke president Edwin Vroom noted that independent investment advisers typically need a trader and backup trader to execute transactions. "With two firms, that's four individuals, and the JV can size that down to two," said Vroom. The firms retained Roanoke's IT administrator while terminating Abner Herrman's.
Throughout the process, Abner has insisted that the firms detail their exact needs from a trading desk and back-office perspective. "It forced each of us to recognize the functions we needed and determine the right set and configuration of people and resources to do it," said Roanoke SVP Adele Weisman.
The back offices of most RIAs are "almost carbon copies," said Vroom, and "they lend themselves to being merged to achieve significant efficiencies." There's little need, for example, to support duplicate contract-based services such as Web site maintenance and information sources that support research. Accounting, compliance and legal services can also be consolidated, and the venture's larger scale can help the firms negotiate more attractive fees. Integral operations such as portfolio accounting may also be on the table. "Now we're running two systems, and we're exploring the benefits of one," Abner said.
While Abner Herrman uses the professional version of Intuit's QuickBooks, Roanoke had been using the more robust Sage MAS 90 accounting system. QuickBooks "turned out to be more than adequate for our needs and much less expensive," said Weisman.
Similar Models
Vroom and Weisman were introduced to Abner last summer through a mutual acquaintance and discovered that their firms had much in common. "What really facilitated the joint venture are the similarities," said Weisman, pointing to the firms' lack of regulatory issues and client-centric approaches, which have resulted in longstanding customers. "Also, the investment processes on both sides are driven by fundamentals--we're not technicians," said Weisman.
