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:
- Moving existing clients into your fund (Best option, if you already have an RIA business to support it)
- Seed capital through an investor (Can be a good option depending on the economics)
- 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!