How Launching a Mutual Fund Can Help Advisers Manage More Effectively
While the mutual fund asset pool continues to grow, fund managers are also seeing increases in money put into Separately Managed Accounts. With gross assets – or Regulatory Assets Under Management – near $38 trillion, according to the Investment Adviser Association, SMAs have reached levels not seen since before the financial crisis. Investors are clearly noticing some of the advantages to these accounts. They receive customized strategies, often get a high level of personal attention from their money managers and have the ability to see all of their specific holdings in one statement.
That said, SMAs aren’t designed for all investors. They can come at a higher cost to investors and sometimes create barriers to broad diversification and certain securities. And because most separately managed accounts require a robust minimum amount, the average investor can’t always take advantage.
For managers, Separately Managed Accounts also create some challenges. The operational complexities can make scaling a successful investment strategy more difficult. That’s especially true for firms with fewer dedicated internal operations resources. Managers that bend the minimum requirement rules in order to bring on new clients with multiple accounts or please a long-standing clients also create administrative challenges. There is a way for managers to achieve scale, operational efficiencies and more effectively implement the investing strategy, while creating new opportunities for their investors as well – launching a mutual fund.
Launching a mutual fund might not be as simple as flipping a switch, but it’s not as onerous a process as many managers may think. And there are some distinct advantages when compared to a separate account structure. Outlined below are some of the key advantages of a mutual fund for both advisers and investors and some signs that it may be time to consider launching a fund.
Administrative Efficiency –Converting SMA assets into a newly launched mutual fund creates efficiencies and execution advantages that aren’t available in separate accounts. In a mutual fund structure advisers can buy securities in bulk as opposed to buying individually, eliminating duplicative trades and tedious individual reporting requirements that are the norm in SMAs. But it’s not just a time saving play; there are cost savings that come from limiting trading in individual securities for individual accounts as well. Advisers can often more effectively execute their strategies in mutual fund as well because they have access to a broader range and conceivably better performing securities.
Access to New Investments– By pooling assets in a mutual fund, investors can gain access to asset classes and investment opportunities they simply can’t get in an SMA. That often results in an ability to achieve greater diversification. Beyond access to new investments, a mutual fund comes with the expertise, professional management and analysis of the full investment team that can create a distinct advantage for investors.
Access to New Investors– For managers, a mutual fund creates the opportunity to gain access to a new audience of investors and a new stream of assets. While some advisers may launch a fund only for the benefit of current SMA clients, there is an opportunity to provide access to the firm’s clients who couldn’t meet the minimums of the SMA strategy or to target a broader base of retail investors in a mutual fund structure. Mutual funds open doors to new channels but those channels do come with additional costs to support them that the adviser needs to consider before making a move.
While there are many advisers who would benefit from converting their SMAs to mutual funds, there are many for whom the SMA structure remains the best option. So, when is a mutual fund a better option for advisers? Below are some important considerations and potential triggers for managers considering whether launching a mutual fund is the right strategy for their separately managed accounts:
Has Your Admin Become Too Cumbersome? If the answer is yes, then this strategy is one of your primary alternatives. Advisers who manage too many SMAs find themselves spread way too thin, making it difficult to focus on the firm’s investment strategy through all of the operational clutter.
Do You Have Compliance Concerns? Global Investment Performance Standards (GIPS) compliance is tough enough to manage. The differing execution of each SMA in an adviser’s arsenal piles on more compliance considerations and reporting intricacies. While concerns alone won’t push an adviser toward launching a mutual fund for SMA investors, it’s important to address this constantly during the expansion process to see if a change becomes necessary.
Are You Looking for Retail Investors? Advisers that decide to launch a mutual fund have the opportunity to open it up to an entirely new and different investor base. Prospective investors that were turned away because of SMA minimums now have the opportunity to leverage the firm’s strategy. However, managers aren’t obligated to open these funds up to retail markets.
Can Your Firm Support the Cost of Managing a Fund? Launching a fund comes with inherent costs, but those costs are drastically different if the adviser decides to go with a retail strategy. A non-retail mutual fund is easy to manage and the firm will save on TA fees, but they won’t be able to expand. Serving a retail base comes with a higher cost, one that the firm needs to evaluate before jumping into a second channel.
While no one approach is going to fit every firm, finding the answers to these questions will start advisers down the path toward the type of growth that fits best. They address the long-term strategy, while still keeping present investors in mind by preserving the advantages of a separately managed strategy. With SMAs booming the investment world, the opportunity might be too good for some advisers to pass up. By using this approach, more advisers won’t have to.
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