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May, 2014

What Does It Cost to Launch a Mutual Fund … Really

My first experience with launching a mutual fund was a little like the old adage about the blind men and the elephant. Everyone I turned to for advice was very helpful about one piece of the puzzle – but I never felt like I had the full picture. A big part of why we launched Independent Channel Advisors was to help RIAs and other Investment Managers bridge this knowledge gap when bringing their new products to market.

So, onto the main question of this post:

What does it cost to launch a Mutual Fund?

The short answer is $70K to $85K depending on whether it’s a traditional or alternative asset class fund. Where your fund falls on this spectrum depends on the type of fund, the number of share classes, whether you want audited performance in the prospectus, etc. Here’s a breakdown of the key expenses:

Advisor Expenses Traditional Asset Classes Alternative Asset Classes
ICA Consulting Fee

$15,000

$15,000

Offshore Legal, establishing the Controlled Foreign Corporation (CFC)

$0

$15,000

Outside Counsel, establishing mutual fund prospectus and filings with the SEC

$30,000

$30,000

CCO Due Diligence Visit

$5,000

$5,000

Misc. fees Blue Sky, Symbol, Prospectus, etc.

$25,000

$25,000

Total origination/registration out of pocket for Advisor for one fund

$75,000

$90,000

Can I afford this?

Initial seed capital or cost of distribution is the single biggest factor to consider when assessing the financial viability of a fund. Annual operating costs will run from $185k- $235k/year. Depending on what your pricing model is, your break-even point can be anywhere from $15MM to $35MM in AUM in the fund. Breakeven here is being defined as the point at which the fund pays for itself. Several variables go into the breakeven calculation but the primary factors are the management fee and the fee cap that most managers will set for initial shareholders.

It is essential when launching a fund that managers have a plan for achieving profitability within a reasonable time period. Most plans will include one or more of the following options:

  1. Moving existing clients into your fund (Best option, if you already have an RIA business to support it)
  2. Seed capital through an investor (Can be a good option depending on the economics)
  3. 3rd Party Marketing (Make sure you do due diligence on the 3rd PM before signing any agreement)

We support clients with all three of these options. My earliest experience was with the first of these strategies, option (a). Interestingly, we found that moving smaller accounts out of separate accounts and into a pooled vehicle was great for both our clients and our firm. In our next blog post I’ll detail what we learned.

For more information please feel free to contact us today!

Dimensions to a Great Client Experience

When clients perceive multiple and equal substitutes for the provision of a service, there is downward pressure on price. By differentiating your client experience, you can protect your margins, increase client loyalty, and gain more word-of-mouth promotion of your financial advisory business.

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When most or all of these elements are present, odds are greatly increased that you’ll deliver a great client experience

  1. Value. Value is a foundation for the overall experience. The client must answer the question: “Are we better off?” Do your clients fully appreciate the value you are currently offering? What could you do to enhance their perception of value-added in your relationship? Are you regularly tracking and communicating your impact? Would greater communication and transparency enhance your client’s sense of value?
  2. Education. Do your clients feel they have learned on a personal level that you have improved their financial goals? What are you doing to educate your clients? What can you do to build your client’s sense of security with your FA business?
  3. Engagement. Do your clients feel like active, involved participants in their financial investment process? Or do they feel like something is being “done” to them? What opportunities could you create to draw your clients in and make them greater participants?
  4. Emotional Resonance. Are you engaging your clients’ emotions—their hearts—through the experiences you create? Are your conversations always focused on the analytical and rational, or do you also touch on the emotional side and ask questions about feelings—about fears, hopes, excitement, and aspirations? Could you infuse your presentations with more stories, graphics, and videos?
  5. Entertainment. Have you captured the client’s attention and created enjoyment and fun? This is not trivial: People learn more, are more engaged, and are more open to new ideas when they are having fun. Is working with you, your team, and your support staff enjoyable?

When most or all of these elements are present, the odds are greatly increased that you’ll deliver a great client experience. The results can be powerful!

A Great Client Experience Creates a Great Client

The new standard for financial service won’t just be happy clients; it will be clients who depend on you to be there for them for their wealth counseling needs. These savvy investors will value inherently in the premium level of client experience you deliver. Keeping pace with rising service levels year after year is vitally important. However, effectively raising experience levels proves to be difficult in implementation. Many advisory businesses are still not delivering exceptional client experiences.

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Clients expect consistently high quality responses to their wealth planning needs

In addition, increasing choices and rising client expectations make it challenging to keep your clients returning. Competitive pressures are higher than ever. Social networking, mobile applications, and consumer retail websites have raised investor expectations for the services that financial advisors can provide online.

The Internet also means transparency between your pricing and your competitors’—with competing offers just a click away. The bar for acceptable levels of service gets pushed higher each year. Services that clients deemed acceptable last year and gave high satisfaction ratings are now average. Next year, the same advisory service level might evoke a negative client response.

All these factors mean that EVERY interaction you have with a client matters. If they walk into your office, call you, seek online support or email you, they’ll expect consistently, high-quality responses to their wealth planning needs. Clearly, there are tremendous opportunities to be gained by transforming your client experience model. Financial advisory businesses that understand this are designing experiences that satisfy both rational needs and emotional ones. These Finserv-industry leaders are making it easier for clients to become loyal advocates. These advisors provide interactions that are innovative, sustainable and consistent, which in turn, build stronger emotional relationships with clients at every step. KAR Consulting knows the goal to provide an exceptional experiences to your clients is attainable.

A great client experience creates a great client