Thinking about getting out of the mutual fund business? Do you just want to manage money?
| Dan Sondhelm|
Being a boutique mutual fund company today isn't easy. Even if your products have strong performance, it's getting harder for all but the most well-known investment firms to build assets under management. Institutional and broker-dealer gatekeepers are less likely to let you in the door; independent advisors won't take calls from wholesalers; broker-dealers' "pay-to-play" arrangements may often cost $100,000 or more per fund; and downward fee pressures have continued to force asset managers to do more with less.
It might be time to think about merging with or selling your funds to a more experienced fund company that has the resources and expertise to take on the sales, marketing, and
administrative tasks you donít like to do — while letting you continue to manage investment decisions as a subadvisor.
Likewise, if your firm is thinking about expanding into the fund business, starting off as a subadvisor for a larger fund company can give you the hands-on experience needed to
decide whether managing funds is the right next step for long-term revenue growth.
Why You Should Consider Sub-advising
I had a client whose fledging $60 million fund was purchased by a global asset management firm. Within a year, he was managing more than $1 billion in mutual fund and separately managed accounts for this firm.
Assuming your firm has a solid performance record, and that superior performance is the result of skill rather than luck, becoming a sub-advisor may be a good option for growth.
Focus on What You Do Best
Offloading — or avoiding — the burdens of mutual fund administration and distribution lets you focus your efforts on managing money and execute alpha-generating investment
Broaden Your Exposure
Smaller fund firms often have to focus their limited sales and marketing resources on narrow market segments or just a few broker-dealers. However, a large asset management company can use its scale in sales, marketing and public relations to
market their expertise to a wider audience. This broad audience could include large RIAs, wirehouses, regional broker-dealers, institutional consultants, private banks, family offices and retirement plan providers.
Support Sales and Marketing, Instead of Owning It (or Not Doing It)
Fund companies with a suadvisor model use their sales and marketing teams to focus on the right market segments at the right rime. They can leverage teams of wholesalers, digital marketing, and public relations expertise that smaller firms often can't. Of course, this doesn't let you as a subadvisor off the hook. You'll still need to provide detailed portfolio metrics that prove performance attribution and ongoing investment market outlook and detail the decision-making processes. And key members of your investment team may need to be available for media appearances, webinars and in-person sessions with clients and prospects.
More Funds and Types of Accounts
Many subadvisors still manage money for their own retail and institutional investors. And if the funds you're subadvising deliver strong performance, your fund's investment advisor may give you opportunities to manage separately managed accounts or variable annuities.
The Potential Tradeoffs
Of course, there are always some risks involved in serving in a subadvisory role rather than managing your own mutual funds.
Your overall profit margins may be lower, since you'll have to share fee revenue with the fund company. But this may be offset by increased assets under management.
You'll give up the independence that comes with running your own funds. And you may have to change technologies and adopt new operational and compliance procedures to comply with those used by the fund company.
Your portfolio managers and analysts may need to spend more time meeting with wholesalers, clients and prospects than they're accustomed to.
And yes, your firm may be fired at any time, for reasons that have nothing to do with performance.
Strategies for a Successful Adoption
If you're thinking of merging with or being acquired by a larger asset manager, you'll want to make sure that this melding of resources will be beneficial to both parties.
Evaluating a Potential Partner
Just because your firm may be the "junior partner" in the relationship doesn't mean you should give in to the first offer you receive. You'll want to conduct extensive due diligence to make sure that the match is the right fit. Look for firms whose corporate culture and values align with yours.
Look for firms that have a history of merging with or acquiring smaller firms and also bring sales and marketing capabilities to the table.
Think twice about partnering with firms whose signature strategies overlap with yours. This can help you avoid "us vs. them" competitions that are likely to result in less sales and marketing resources allocated to you.
Larger partner firms may offer more resources, but they may also have more corporate red tape to deal with.
When the time is right, talk to their existing subadvisors. Ask if they are still happy with their decision related to managing money and allocated sales and marketing resources.
Impressing a Potential Suitor
Larger firms have plenty of adoption candidates knocking on their doors. Many have mutual fund research teams, acquisition teams and CEO's who spend plenty of time talking to their newest potential partners. So make sure that you've got all of your due diligence ducks in order. Significant assets under management, strong performance, sellable fund category and plenty of selling agreements will likely be of more interest to
The best buyers do their homework before the first meeting. One buyer we worked with came to the table with a one page analysis that was more comprehensive, and hurtful, than the potential seller ever expected. Specifically, the report pointed out performance and star ranking would likely drop significantly in the next 12 months. They were willing to talk with the candidate if the economics were in the buyers favor and there was no commitment to sales and marketing resources. The seller walked away and never had that meeting.
Update your pitchbooks with your investment process, performance and risk measures. Conduct mock meetings with people in your firm most likely to be interviewed and prepare them to answer tough questions or counter any negative issues your firm or fund may have received.
Remember that this is, in large part, a sales process, and your firm's products and intellectual capital are only one part of the package a potential partner will be considering.
A Survival Strategy?
As passively managed mutual funds and ETFs continue to take market share away from actively managed funds, it's only going to get harder for lesser-known boutique fund companies to knock down barriers to entry.
If your firm is willing to sacrifice some of its independence and immediate revenue to potentially increase assets and gain access to new market segments, becoming a subadvisor and leaving sales, marketing, and administration to potential partners may be best the way to go.
Dan Sondhelm is CEO of Sondhelm Partners, a firm that provides marketing, public
relations and sales strategies and matches mutual fund company buyers and sellers.
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