Distribution is a key factor in the success of a Mutual Fund
operation. There are several options or channels through which a fund can access
assets. The question is… Which ones will provide the quickest path to collecting
enough assets to reach “critical mass” - the level at which a fund can support
itself without support from the advisor.
fund’s advisor is generally already in business at the time it decides to start
fund. Often the quickest road to success in raising the initial seed money is to
go to sources where the advisor has previously raised money. This may mean
existing clients or brokers through which money for separately managed accounts
have been raised. Often, advisors have minimum account size requirements. Many
times the customer wants an advisor to take amounts which do not meet the
minimum. The amounts of non- qualifying accounts can sometimes be combined as a
source of startup money. Clients who use the advisor often have retirement
accounts or accounts for their spouse or children which can be provide a source
for starting a fund. Profit-sharing accounts, if large enough, could be a source
of money to kick off a fund.
IDENTIFYING THE CHANNELS
Identifying the different channels or sources of
incoming assets is the first step in developing a marketing focus or plan.
Sources of assets can come from the following sources:
1. Existing clients or relationships- your own customer base.
2. Fee Based Financial Planners such as Brokers or insurance
3. Individual Investors who makes their own decisions and buy
through discount brokerage firms.
4. Registered Investment Advisors who have discretion over
investment decisions for their clients.
5. Retirement Plans who make funds available as options for their
employees (401k, Profit Sharing Plans, etc.)
6. Commission based stock brokers.
the initial money becomes available, the question now is which channels of
distribution to pursue. It is our experience that, typically, a balanced
approach using multiple channels of distribution has the greatest possibility of
success. A key to success will be to identify the channel(s) which can help
raise the necessary assets to reach critical mass.
The format of the fund
determines the channel
Different formats of a fund are classes of the same
fund. The differences between classes are generally differences in the
distribution charges applied to each class. All other expenses are common to
each of the classes.
For example, Load classes, such as an “A” Class, have a front end
load with a trailing payment that continues as long as the fund is held. This is
often called a shareholder servicing fee or trail. It typically is .25% of
assets and paid to the broker or party that referred the fund to the customer.
Supermarket Platforms use shares classes that may have shareholder
servicing fees but usually do not impose a sales charge. There can be a P, or
Platform, Class which has both a 12b-1 fee and a shareholder servicing fee to
cover platform expenses. The shareholder servicing fee can be as high as 40
basis points or .4% of net assets (Click here for more information on Supermarket Platforms).
Fee based Financial Planners seem to focus on classes which have
the lowest expense ratios or Institutional Share Classes.
Brokers often want a front-end load to induce its sales personnel
to sell a fund to their clients. Retirement Accounts often utilize “retirement
classes” which have a charge made available to the Administrator of the plan to
cover Administrative costs of the plan.
wholesalers focus on all available channels. They target areas where large
amounts of assets can be raised through a single relationship. Investment
advisers who utilized mutual funds as a means of investing are primary targets.
Brokerage firms who have programs utilizing a model portfolio are high value
targets. Participation in a model portfolio program can result in a continuous
flow of new money as the model portfolio grows.
The channel of distribution through brokers selling shares with a
front end load is less significant today than it was 5 to 10 years ago; there
were three types of loaded classes: A-Class Shares with a front end load and a .25%
trail, B-Class Shares with no front end load but a 1% 12b-1 fee and a declining
Continent Deferred Sales Charge (“CDSC”) fee, and C-Class Shares with no load to
shareholder but a 1% 12b-1 fee. Today, B-Class Shares have vanished from the
scene. A-Class Shares are very rare in that the front end sales charges are
often waived for wrap programs and fund supermarket programs. Class C shares
have a small, but established, following among brokers who want to maximize the
continuing flow of revenue for themselves and offer their clients a product
which does not decline in value as soon as it is purchased. The most effective way of utilizing this channel is through the use
of the wholesaler that focuses on the brokerage community.
This is the way that funds were traditionally sold in the past.
Success in this channel is dependent upon the skill of the individual
wholesaler; the wholesaler represents an additional cost. A lot of money can be
raised quickly if the wholesaler is successful. If not, any money raised will be very expensive. For the individual
advisor, the cost of loaded sales is prohibitive if there is only one product or
fund to sell unless the advisor has ties to a Broker Dealer.