May 15, 2018

| Distribution

Typically, when an investment adviser thinks about launching a mutual fund, they commonly ask, “How much does it cost to launch a mutual fund?” The more prudent question to ask would be, “How much does it cost to launch a successful mutual fund?”

These days many funds are launched using the series trust structure, which can afford an adviser some efficiencies in organization and operational cost and reduced time to market. Those are certainly important considerations, and we will discuss those in more depth later in the next two successive blog postings. However, to help focus on long-term success, advisers should consider several other factors before they think about the organization and operational costs for a fund. What are those factors?

  • Source of Investors: Identifying your target audience. Most successful fund launches are built on knowing who will invest in the fund in the first few years. For example, an investment adviser’s current industry partners might indicate that they would invest in a mutual fund version of an existing separate account strategy. Those partners may also suggest slight alterations to a strategy that would make it more attractive. For example, a client of ours planned to launch a small-cap fund, but industry distribution partners advised that a small/mid-cap (SMID) fund would be better suited for the current market conditions. The client took that counsel and raised several hundred million dollars in the first three years.
  • Marketing Efforts. An adviser recently told us he thought he would spend 98% of his time managing his portfolio, and instead, found he spends 98% (only slightly exaggerating) on marketing activities. Of course, those percentages will vary, but it is rare for an adviser to be successful without having a public component through marketing initiatives.
  • Knowing and Telling Your Story. Many advisers with sound strategies haven’t taken the appropriate time to hone their “elevator pitch.” As attention spans have decreased, having a concise story developed and ready to tell is a significant advantage. That then feeds into pitch books, fact sheets and a digital presence. A few good rules of thumb/questions to contemplate when developing a story:
    • Creative – How is the strategy unique?
    • Consultative – What problem does the strategy solve? How does it fit/what does it replace in a portfolio?
    • Clear – Is the story easy to understand?
    • Consistent – Does the strategy stick to the story and do what it says it will do?
  • Creating a Solid Online Presence. New funds are more likely to attract assets from independent investment advisers during the first few years than other channels such as broker-dealers and consultants. Therefore, designing a website that is individualized to an adviser’s story is invaluable. More and more independent advisers look to gather fund information from digital sources such as websites and prefer to do it on their schedule, instead of the traditional wholesaler call. Thus, having a solid web presence is important. And, because mutual funds are heavily regulated, working with a designer who is familiar with fund regulations can save many headaches along the way.
  • PR Strategy. As alluded to above, the investing public in general, and an adviser’s chosen sales channel in particular, needs to be regularly reminded of the adviser’s story. Many successful advisers retain public relations experts to help them become recognized experts in non-paid media outlets, which tend to increase the adviser’s long-term credibility. Social media is another way to reach investors. But due to regulations, expert assistance should be sought to assure there are not any regulatory problems.
  • Planning for Intermediary Platforms. It is rare for a fund today to not rely on one or more of the intermediary or supermarket sales platforms. That doesn’t mean that getting on every possible platform is wise or even necessary for a successful fund launch. Establishing a platform strategy, and designing a fund to be salable on the chosen platforms, are important to contemplate early in the planning process.
  • Hiring Sales Talent. An adviser may be tempted to hire a sales person who has exhibited previous success selling for a well-established fund family. Be aware that the skills and temperament required to sell a new fund are very different from those used with existing funds. It is also critical to consider the right timing—hiring the sales person too soon can result in wasted capital.

These are just some of the costs to count when planning for a successful fund launch. In other words, launching and operating a successful mutual fund means the creation of a distinct business, even for advisers who have served clients for many years. So, in addition to choosing great service providers and business partners, at a minimum the business plan should address the factors we have discussed here. Some can be developed on parallel paths as a fund is being organized and the SEC reviews the initial registration statement. We’ll delve into frequently asked questions about the organization and operational costs in two future blog posts.

Next up in this three-part blog series:

Part 2 – Launching a Mutual Fund: Top 5 FAQs

  1. What is the timeline for creating a ’40 Act mutual fund?
  2. What is a Series Trust?
  3. How much does creating a ’40 Act mutual fund cost?
  4. What is the typical breakeven for a mutual fund?
  5. How much in seed assets are required to launch a fund?

Part 3 – Launching a Mutual Fund: Compliance and Regulatory

  1. What are the general limitations in a ’40 Act mutual fund?
  2. Can a performance fee be charged by the adviser?
  3. What is a fulcrum fee and how does it work?
  4. Can the track record from Separately Managed Accounts (SMAs) be used to market the fund?
  5. Can a hedge fund be converted into a mutual fund?

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DISCLOSURE: Information contained on this website is based on public data, historical agreements and dialogue with intermediaries. Such information represents our current understanding of the described platforms and the costs associated with them. In many cases, such costs may be negotiable. All pricing and fee information is subject to change without notice.

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