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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.


A mutual fund’s advisor is generally already in business at the time it decides to start a mutual 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 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 agents.

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.



After 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.


Modern 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.