If you’re a registered investment advisor with a unique investment approach or a new twist on an old one, you’ve probably considered turning that idea into a mutual fund or an exchange traded fund. But a great investment idea by itself is no more sufficient for launching a fund than a great recipe is for opening a restaurant. No matter how strong your investment thesis, there’s a lot more that goes into starting a fund.
First, after determining that your investment idea is sound, you need to identify the persona of your typical investors, which could be current clients, high-net-worth clients working with financial advisors or institutions such as endowments and foundations. After deciding who you want to attract, conduct a target market assessment to gather information about their wants and needs. That research should help you decide how you want to structure your fund and the right distribution channels. Understanding the buyer and how they approach investing are key to getting your fund up and running.
Once you have that great investment idea and know your target investor, it’s time to honestly assess what you have to offer. Where would this fund fit in the investment marketplace and what is its competitive edge? This might be a cost advantage that allows you to charge less than the competition for delivering the same or superior value. Or perhaps you have stronger technology or proprietary intellectual capital. If so, you need to define it and determine how to communicate it to investors. This helps lay the groundwork for developing a tactical distribution plan, which includes creating a marketing campaign and identifying qualified opportunities. When calculating your total cost for distribution, you will need to include marketing resources, platform placement and sales activity.
Other questions to ask include:
- What commitments can you make as an organization to marketing and selling your strategy?
- Are you going to employ a PR firm or try to do everything in-house?
- What story are you trying to tell and where are you going to tell it?
- Will investors understand the concept or will education be necessary?
- Do you have the manpower to deploy active sales and marketing activity?
If you determine that launching a mutual fund or an ETF is indeed the right way to go, the next step is to cultivate strategic partnerships. If you are launching an ETF, you might consider partnering with listing agents or other ETF or mutual fund providers that complement your strategy and can work with you on joint sales activity.
If you have the right strategy and distribution resources, there’s a lot that launching a fund can do for your business. For example, creating a ’40 Act fund structure can help simplify things for advisors who have a robust separately managed account business. With SMAs, the advisor manages multiple accounts; the more individual accounts, the more cumbersome it may become. It gets more complicated if you are customizing those individual accounts because then you are also spending human capital. Even if you do block trading, you have to reconcile the securities to each account. The benefit of creating a mutual fund instead is that you then have one trade and one reconciliation, and the investor buys shares in that fund rather than actually owning the underlying securities.
Remember that best practices for launching a fund start with taking a close look at the viability of your investment idea, your target market, your preferred fund structure, and your competitors, both large and small. After you’ve done all that, make sure you have sufficient marketing resources to build the brand recognition and awareness you’ll need to capture investors’ assets. Most importantly, conduct an honest assessment of your investment strategy and its differentiators, and what it will take for your fund to succeed and grow over the long term.