Most financial advisers can relate to the challenges of handling smaller accounts that are inherited from the relatives of existing clients, or are in the form of small “orphaned” retirement accounts.
For an adviser with a client account minimum of $500,000 or more, a $50,000 account can add up to more work than it's worth.
One solution gaining popularity is the shared-
trust route to consolidating smaller accounts into a publicly traded registered mutual fund.
For advisers and smaller money managers who have chosen not to launch and maintain a mutual fund because of all the regulatory red tape and back-office hassles, the
trust structure may make a lot more sense.
“One of the most common reasons for an adviser to start his own mutual fund is to deal with the smaller accounts,” said Andrew Rogers, president of Gemini Fund Services LLC.
Gemini, which has been a back-office-service provider since 1983, started its Northern Lights Trust operation three years ago, and has so far helped launch 75 mutual funds.
Poor performance and an inability to raise assets have led to the liquidation of 30 of those funds.
The
trust currently represents $2.1 billion in 45 mutual funds, with more than a dozen new funds currently in registration, according to Mr. Rogers.
Gemini is one of several operations, mostly concentrated within large banks, that offer these kinds of turnkey services for launching and maintaining mutual funds.
The
trust model is designed to handle administrative responsibilities, providing advisers with an advisory board, officers and a compliance infrastructure.
“The adviser is only responsible for managing the money and raising assets,” Mr. Rogers said.
Of course, that “only” part shouldn't be taken lightly.
Management tasks typically involves applying a core strategy to a mutual fund in which the smaller accounts have been grouped.
David Wright, manager of the $225 million Sierra Core Retirement Fund (SIRRX), said he runs the fund-of-funds portfolio just as he does any of the separate accounts he runs for other clients.
But instead of having a $1 million minimum investment requirement, the mutual fund
trust structure is available for a minimum investment of $10,000.
Advisers like the time-saving advantages of having a fund handle administrative tasks for a number of clients.
“The mutual fund is like one large client who never talks back to us, and never has to be taken to lunch,” said Mr. Wright, whose firm also manages $410 million in separate account portfolios.
Unlike most mutual funds utilizing the
trust format, the Sierra fund started with a considerable asset base: $120 million at its December 2007 launch.
On the other end of the spectrum there is the $11 million Lacerte Guardian Fund (LGFIX), launched last month by Lacerte Capital Advisers LLC.
In Mr. Rogers' experience, a new fund reaches the break-even point at about $15 million in assets under management, and starts earning full fees by no longer having to subsidize fund expenses at $50 million.
This reality has not deterred Lacerte president Doug Wynn, who turned to the shared-
trust mutual fund format by recently converting a two-and-a-half-year-old
hedge fund that was not gaining traction among advisers.
“From a perception standpoint, we found that the
hedge fund had become a tough sell in a difficult asset-raising environment,” he said.
The Lacerte fund's investment strategy, which buys put options for each stock in the portfolio, did not change when the
hedge fund was converted into a mutual fund, but Mr. Wynn is hoping the packaging will make a difference.
“We basically switched to a mutual fund because of adviser demand,” he said. “They kept telling us they didn't like the
hedge fund structure.”
A new Investment Insights column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at
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