The Trust Tale of the Tape Comparing Series Trusts to s and Making the Right Decision for Your Business By Dave Carson, VP, Director of Client Strategies, Ultimus Fund s The Ultimate Mutual Fund Service Provider The mutual fund business is booming. In fact, according to the ICI, at the end of 2016 mutual fund assets increased nearly $700 billion, ending with $16.3 trillion in net assets. With more and more Series Trust Which structure is best? assets at stake, many investment advisors are choosing to capitalize on the opportunity by making their existing successful strategies available as mutual funds. Standalone Trust Unfortunately, simply launching a fund is no guarantee of success in what has become a hyper-competitive market. There are decisions that advisors must make at every step of the launch process that can ultimately make or break a fund s future. One of the most important decisions a firm will make is whether to launch the mutual fund through a series trust structure or a standalone trust. While many advisors are being pushed into series trusts by providers with the promise of getting to market faster and cheaper, those short-term benefits can quickly go by the wayside if the series trust is the wrong strategic fit for the fund, or for the firm more broadly. The reality is that some providers are biased toward series trusts because it s an easier solution for them, but it may not be in the best interest of the advisor. Advisors must go into the process with a strong understanding of each structure and ultimately make the decision that s best for the long-term success of their business. To help eliminate uncertainty in the process, we ve outlined some of the key benefits of both series trusts and standalone trusts and provided tips, insights and critical questions to help advisors get to the right decision sooner. Begin with the Business Plan The first question advisors need to answer is, what s my business plan? It s not just about the fund that s being launched; it s also about the future. Is there a plan to launch more mutual funds down the line? If an advisor goes in with the intention of building a fund family and a large investor base, that could point to the need for a standalone trust. The personality and culture of the advisor s firm is also a significant consideration. Do you prefer to involve yourself in nearly every detail or are you comfortable relying on others for significant services? If the former describes your firm, your own trust might be a better fit, even if you only intend to have one or two funds. 1
Other questions advisors need to ask include, What does my investment strategy look like and how complex is it? A more complex strategy may fit in a series trust, but you should be sure the trust board has the requisite experience to help rather than hinder. Why do I want to bring the fund to market? When do I want to bring the fund to market? These may appear to be fund questions, but they re really business questions; and the answers to these will go a long way toward informing the trust decision. To truly make the right decision, advisors must have a firm handle on their business plan, but they must also understand the benefits of each structure in the context of their business. Some of those benefits are outlined below. Benefits of a Series Trust Get to market quicker Because the board and operational structure already exists, the time it takes for a fund to get to market is significantly shorter in a series trust than it is in a standalone trust. On the flip side, advisors have to ask themselves if 2-3 months is significant when you re talking about starting a business that you hope will be around for decades. Get to market cheaper Similarly to the speed to market, the cost of getting to market is less in a series trust because all the operational components are already in place. However, advisors shouldn t make the decision entirely on short-term costs. Because if the fund fails due to it being in a structure that isn t right, the early cost savings won t matter. Ongoing operational economies of scale Trust level expenses are shared across the funds and are often negotiated at below market rates for custody, legal, compliance and audit services. Insurance costs are also often less because they are spread across multiple funds as well, and the insurer may take comfort in your fund being part of a structure with an established history. Trust-level distribution agreements Many series trusts may have trust level distribution agreements with clearing houses or platforms and that can be a benefit in the distribution process. Advisors should be aware that some platforms such as Fidelity, Schwab, Pershing and the wirehouses won t take trust-level agreements. Benefits of a Dedicated Board In a standalone trust the advisor has a dedicated, hand-picked board. That provides the distinct advantage of allowing the advisor to tailor the board based on investment expertise, relationships or any other characteristic for that matter. For a fund with a simple strategy, that level of specialization may be overkill and that can point the advisor in the direction a series trust. Freedom to Choose Outside Experts Advisors may have existing relationships with legal counsel, auditors and custodians that they want to use for their fund. In a standalone trust they have that option. In a series trust those resources are chosen for them and they may not have an immediate level of comfort with the team that s in place. Beyond comfort level, the skills and expertise of outside experts become increasingly important the more complex the investing strategies become. 2 Lower Reputational Risk Unlike a series trust, a standalone trust gives advisors significant autonomy over risk issues. If a series trust provider gets hit with a regulatory infraction, the funds in the trust may be considered guilty by association. In some instances, funds in a series trust have to sticker their prospectus or Statement of Additional Information (SAI) for an infraction that they may have had no involvement with.
Greater Control A standalone trust gives the advisor control over the business plan and the flexibility to change service providers if they aren t getting the level of service they expect. It also makes it easier to create and change sub-advisor relationships. Control can be important, but advisors must remember that control comes with a cost. Board Governance Confidence Board governance matters may be the greatest difference between series trusts and standalone trusts. No matter the structure, the board represents the shareholders and there are times when there will be disagreements between the advisor and the board. In these instances, it may be more comfortable to have those conversations with a board you ve appointed rather than a board you ve just met. The Role of the Service Provider The service provider plays an important role in the process regardless of whether the advisor chooses a series trust or standalone trust structure. But when it comes to a series trust, the provider and the trust are a package deal, so that makes due diligence that much more important. A service provider should enhance the advisor s ability to succeed, not be a barrier to success. The advisor should have a level of comfort that the service provider has the right technology for reporting, accounting, transfer agent and Blue Sky among others. They also need to make sure they align on the definition of success, whether that s fund performance, operational efficiency, longevity or even the amount of assets gathered. It s important to be on the same page with the service provider, but it s equally important to speak to existing clients of the administrator to make sure they actually do what they say. The Challenge with Changing Trusts Underscoring the importance of making the right trust decision are the challenges it takes to transition from one trust to another after a fund is established. There are varying degrees of difficulty in making a switch, but the reality is that no matter what the shift there can be conflicts with the board and hurdles to jump through before a transition can be approved. Switching from a series trust to another series trust is likely the path of least resistance, but there are still hoops to jump through. The current board must approve the fund s exit plan, which can be challenging, and contractual obligations can be difficult to get out of from a show-cause perspective. These decisions are often subjective and many service providers aren t likely to let a fund go without a fight and sometimes stiff exit fees. Asking about these factors during the up-front due diligence on your initial service provider can help you avoid nasty surprises down the road. Transitioning from a series trust to a standalone trust is likely the next easiest move to make, but an advisor still faces the challenges outlined above while simultaneously taking on the task of creating a new standalone trust. The most challenging transition might be moving from a standalone trust to a series trust. Why? Even if the move is being made for the right reasons, the board often isn t overly excited about voting themselves, the auditor and all the other partners involved in the trust out of a job. 3
The Bottom Line Choosing a series trust or a standalone trust is a critical component in the fund start-up process. Make sure you treat it that way. Know the pros and cons of each structure, and base your decision on your specific needs. Do your due diligence on service providers and their ability to help you succeed. Perhaps most importantly, make sure you have a firm understanding about what you want your business to look like in the future before making a hasty decision today. Make no mistake, series trust vs. standalone trust is more than a structure decision, it s a business decision. Hopefully this tale of the tape helps eliminate some of the sticking points in the process while putting you on the path to long-term fund and business success. We trust it will. To help illustrate the decision-making process of selecting a series trust or a standalone trust structure and the factors that go into it, we ve pulled together five brief anecdotes. Perhaps your circumstances or business situation is similar to one of these. ULTIMUS SCENARIO #1 Multiple Funds We were meeting with a large investment manager who told us they were going start a family of four mutual funds. The manager had enough assets to seed the first four funds initially and had a longer term business plan to launch another four to eight funds. Given the complexity of some of their strategies and the sheer volume of funds in their long-term plan, a standalone trust seemed to be the obvious structure to support their business. As I walked them through the rationale and the business benefits of a standalone trust, it became clear to them that it was the right solution as well. At that point, one of the firm s principals said to us, you know not one other administrator we ve talked to has even mentioned the idea of creating a standalone trust. They only talk about why their series trust is better than others. In that meeting it became clear to us that some administrators may push a series trust because it is easier and more profitable for them as opposed to recommending what s truly the best solution for the manager. ULTIMUS SCENARIO #2 Complex Fund Strategy We were talking to a fund advisor who had launched an equity income fund through a series trust offering. After successfully managing the fund for a period of time, the advisor had plans to launch a second fund. The planned fund would be an Energy Master Limited Partnership fund (MLP). In talking through the plan with the board and service providers of the series trust, it became clear to the advisor that the attorneys and accountants didn t understand the nuances of the MLP fund. Given that dynamic, the advisor decided to select service providers with direct MLP experience and launched the new fund through a standalone trust. Their original equity income fund remains in the series trust given the cost and administrative issues of making a switch. If the advisor had taken its long-term business plan into consideration when it launched its first fund, they would likely have created a standalone trust from the beginning and avoided some of the unnecessary administrative challenges. Plus they wouldn t have had to deal with the inefficiencies of having two funds in two different trusts with two different service providers. 4 ULTIMUS SCENARIO #3 Multiple Funds, but Admin Averse Series Trust We were in discussions with a hedge fund manager who had several billion dollars in assets. The firm had a strong performing long only strategy that was available in two existing private funds and also in a separate account structure. The unique aspect of the strategy was that it had a performance fee so it was only available to accredited investors. The firm had significant interest in the strategy from outside its current investor base and wanted to make it available in a mutual fund strategy to capitalize on the demand. Given the large amount of assets the firm managed, the nature of the strategy and the fact that there was a likelihood of more funds being created down the road, a standalone trust seemed to be the best structure for launching the fund. After deeper conversations with the management team and getting a better understanding of the firm s goals and business priorities, it became clear that the firm did not want to deal with the day-to-day administrative responsibilities that would come with maintaining a standalone trust. With a full understanding of the goals of the firm and the fund, we recommended a series trust structure. That approach allows the firm to focus on its core competencies of asset management and asset gathering rather than dedicating additional resources to administrative functions.
ULTIMUS SCENARIO #4 Institutional Manager and Multiple Funds Series Trust An institutional fixed income manager with more than $5 billion in assets was considering launching a mutual fund. When we began our conversations, the strategy was being implemented through a separate account structure with an average account size of about $25 million. The firm was turning down a significant number of mandates below its SMA minimum and wanted to launch a fund to take advantage of those missed opportunities. The firm had a large amount of assets and a stated plan to launch a number of additional funds in the future. Those two factors would seem to make a standalone trust an ideal structure for launching the current fund and setting the foundation for future funds. What become clear after a number of meetings was that despite the fact that the firm had a large amount of assets and a long-term plan to build a fund family, it was an institutional manager at heart. That meant while it had a large amount of assets and opportunity it had a relatively small number of people and an even smaller appetite for dealing with the administrative demands of maintaining a standalone trust. While creating and maintaining a standalone trust would likely have meant more revenue for our firm in the short-term, the right move for the manager was clearly a series trust. We made that recommendation and helped them through all the aspects and decisions of joining a series trust. The firm is thriving in the series trust and its plan to launch more funds is coming to fruition. ULTIMUS SCENARIO #5 Multiple Funds, Cost Sensitive A manager with several billion dollars in assets in multiple vehicles separate accounts and private funds planned to launch one or more mutual funds to bring their strategies to a wider audience. As the conversations unfolded we laid out options, pointing to the benefits of a series trust if they were going to launch a single fund and the advantages of a standalone trust for multiple funds. What became obvious in our talks was that they didn t think that a standalone trust was a viable option for them from a cost standpoint. When we showed them the numbers and they saw it was a real option, it was eye opening for them because other firms they talked to didn t even discuss it. Ultimately, we told them that the real question that needed to be answered was: how many of their strategies would actually fit into a mutual fund structure? That would help inform the structure question. The business strategy and the product strategy should drive the fund structure and not the other way around. ABOUT THE AUTHOR Dave Carson, VP and Director of Client Strategies & President of Ultimus Managers Trust As Director of Client Strategies, Dave manages the series trust product line and provides expert assistance to investment managers considering starting a fund. He is a graduate of Kenyon College in Gambier, Ohio. Dave has been in the financial services industry since 1981, and has almost twenty years of fund and asset management experience. Dave has been Chief Compliance Officer for mutual fund families, registered investment advisors, and an ETF trust. He also served as Chief Operations Officer for a mutual fund family, and previously had senior management responsibility for fund and advisor marketing, fund wholesaling, transfer agency, shareholder servicing and advisor compliance. Dave is co-founder and president of Advancing Fund Governance, a forum for fund trustees and senior officers. He is also a former trustee and secretary of the Greater Cincinnati Mutual Funds Association. ABOUT ULTIMUS FUND SOLUTIONS Based in Cincinnati, Ohio, Ultimus is one of the largest independent providers of mutual fund services in the country. We provide fund organizational services, fund administration and distribution, fund accounting and financial reporting, plus transfer agent and shareholder services for open-end funds. We also provide fund administration and fund accounting services to closed-end funds. Our experienced teams of Passionate Professionals create customized Smart s to generate Remarkable Results for investment managers and their funds., which allows them to focus on growing assets and their investment strategies. For more information, visit www.ultimusfundsolutions.com. 5