Practice Management

More advisers try hand at running mutual funds

But the road to riches is paved with lots of obstacles, experts say

Nov 14, 2010 @ 12:01 am

By Dan Jamieson

Financial advisers who believe they have developed a novel investing approach, or don't want to turn away smaller clients, increasingly are launching their own mutual funds.

“This year alone, we have registered 30 new funds [and] expect 10 more by year-end,” said Andrew Rogers, president of Gemini Fund Services LLC, which helps advisers create mutual funds. “That's a large amount for us.”

Gemini administers 60 open-ended mutual funds, representing about $3.5 billion in assets, through its Northern Lights Fund Trust, which is a shared mutual fund trust comprising independent funds managed by advisers.

Many advisers get into the fund business because they think their approach to investing is unique and likely to catch the interest of other advisers or broker-dealers, Mr. Rogers said.

Many of Gemini's funds, for example, use alternative strategies.

Other advisers launch their own funds as a way to extend their services to smaller clients.

“The thing we most often hear is that [the adviser] wants to be efficient about managing small ac-counts,” said Kip Meadows, chief executive of Nottingham Investment Administration, which oversees 150 funds with $24 billion in assets, including some hedge funds. “They don't want to say no [to smaller accounts], but they can't manage them efficiently without pooled vehicles.”

Advisers using funds run by other advisers should make sure they know exactly what they are putting their clients' money into, said Russel Kinnel, research director at Morningstar Inc.

“There would probably be a wide variety of quality in those types of managers” under a turnkey arrangement like the Northern Lights Trust, said Mr. Kinnel. “That doesn't mean you can't find some good funds” run by small operators.

Advisers are also wrapping their strategies into mutual funds as a way to keep expenses down for clients, said Mike Zarren, director of relationship management at Ceros Financial Services Inc., a broker-dealer and custodian that caters to active, tactical advisers. Buying a basket of stocks through a mutual fund is less expensive than assembling the same basket of stocks through individual trades.

Lewis Arno, founder of Critical Math Advisors LLC, in 2006 formed the Adaptive Allocation Fund (AAXCX) after getting impressive results from his stock selection models. But he needed an easier way for clients to participate.

“I wanted a way to make [my investment results] real,” Mr. Arno said.

He later came out with a clone, the Adaptive Allocation Portfolio, which is used as an investment option in Midland National Life Insurance Co.'s Vector annuity platform.

Together, the funds hold about $46 million in assets.

Individual clients were his first shareholders, Mr. Arno said, and still make up about 75% of the funds' investors.

“We've done very well performancewise,” he said. “It's working out great.”

Anthony Welch and Ian Naismith, co-founders of Sarasota Capital Strategies Inc., did so well in 2008 running individual accounts using currency ETFs that other advisers began asking for a product.

Sarasota in May 2009 launched The Currency Strategies Fund (FOREX), which now has $33 million in assets.

“It's the only "40 Act fund where you can get long or short dollar exposure,” Mr. Naismith said.

Sarasota runs another $35 million individually for clients.


But managing a fund isn't for everyone.

Indeed, running a successful fund requires a significant investment of time and money on the part of an adviser.

“It's not as simple as many people think,” said Mr. Arno, citing obstacles related to costs, keeping up with compliance demands and attracting investors.

The upfront costs to start a fund can run $50,000 to $60,000, including legal costs, observers said.

Registering in all 50 states can bump that up to about $75,000, Mr. Meadows said.

“An adviser shouldn't set up a fund unless they have $10 million to $12 million” ready to put in, Mr. Meadows said. “You should see your way clear to get $30 million to $40 million in the first year; otherwise, the operating costs would have to be covered.”

At that larger level, the fund's expenses can drop below 1.5% and be competitive, he said.

“We normally tell people they should get $25 million in the first year to really make money,” Mr. Rogers said, and $50 million to $100 million to achieve scale.

For a $50 million fund, Gemini's services would run 35 to 40 basis points, Mr. Rogers said.

The break-even on Sarasota's Currency Strategies Fund, for example, was about $12 million.

“It depends on your fee,” Mr. Naismith said. Sarasota's fee is 1.47% and is capped at 1.95%.

A lower fee might require more assets to turn a profit, he said.

Getting assets is no easy matter, though, because the old adage that funds are sold, not bought, still rings true.

“How successful [a startup] is depends on how much commitment in sales and marketing activity” the founders make, said Andy O'Rourke, chief marketing officer at Direxion Funds and Direxion Shares, which have relationships with four outside advisers who run funds on the Direxion platform, although it is no longer bringing on new relationships.

“You do need to get out there and market [a fund],” Mr. O'Rourke said.


Some firms hire a wholesaler, or have someone on staff, dedicated to the fund, Mr. Meadows said.

In August, Mr. Arno began to contact other RIAs, offering his accessibility as a selling point.

“Every time an adviser sends money, we contact them and we make sure they know they can talk to me,” he said.

Mr. Naismith relies on speaking events in front of advisers to get the word out.

Gemini has selling agreements in place and offers some marketing help such as an internal wholesaling desk, Mr. Rogers said.

Getting on mutual fund supermarkets — a necessity — costs around 40 basis points, plus upfront costs, Mr. Naismith said.

A 25-basis-point trail fee on his fund covers part of the cost.

About 95% of all sales come through intermediary platforms such as supermarkets or fund wrap programs, Mr. Rogers said.

“Just being on Schwab's or Fidelity's [supermarket] platform doesn't do anything to generate sales,” he said.

“You have to have representatives out there talking to [advisers] who buy funds for clients.”

E-mail Dan Jamieson at


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