A mutual fund is an investment company, and similar to other types of companies, incurs expenses related to its operations. A mutual fund may use a percentage of its assets to pay fund expenses. This percentage is typically limited (or capped) to maintain a fund expense ratio that is fair to shareholders and can compete in the market. The following summary is designed to help an adviser considering launching a mutual fund, understand fund operating expenses and variables that could impact those costs.
The advisory fee is the fee paid to the adviser for managing the assets of a fund. While an expense to the fund, advisory fees are revenue to the adviser. If the adviser also sponsors the mutual fund, which is very common, the adviser receives the revenue from the advisory fee but is also responsible for paying fund expenses that exceed the cap. In this scenario, the adviser typically waives a portion, or all, of its fee to pay the excess. If that does not cover the overage, the adviser pays the remainder out-of-pocket.
Advisory fees are asset based fees and may include breakpoints if the fund reaches scale. For more information on factors to consider when determining your advisory fee, see our Advisory Fees and Expense Caps blog.
Other Annual Operating Expenses
Accruing and Paying Fund Expenses
Mutual fund expenses are accrued daily and impact a fund’s net asset value. The fund administrator pays fund expenses including the adviser, who is paid monthly. If a fund is operating above its cap, the fund administrator will deduct the amount of expenses above the cap from the advisory fee, prior to payment. If the expenses that exceed the cap are greater than the adviser’s fee, the adviser will reimburse the fund for those expenses. If the fund is operating below its cap, the adviser receives its full fee, and, if the adviser has waived or reimbursed fees within the last three years, the adviser may recoup the difference between the actual expense ratio and the expense cap.
Controlling Fund Expenses
As with any company, expense management is an important aspect of optimizing revenue. The above fees are all necessary to operate a mutual fund however there are ways an adviser can manage expenses. A series or shared trust allocates trust level expenses, such as trustee fees, insurance and certain legal costs, across funds, which can provide significant savings. There are pros and cons to using a series trust versus sponsoring your own trust (stand-alone trust), namely cost versus control, which require careful consideration. A fund administrator can guide you through the benefits and drawbacks of each.
As noted above, limiting Blue Sky state registrations to only the states where the fund is sold, as opposed to registering in all states in advance of sales, can provide meaningful savings. Using your administrator’s legal department to prepare draft filings and assess questions or matters before reaching out to fund or trustee counsel, will help maintain fund legal costs.
While there is a limit to expense management, your fund administrator can play a critical role in helping you understand fund expenses and providing expense management strategies. To learn more about fund operating expenses and expense management strategies, please contact Jessica Chase at 207 347 2016 or submit an inquiry via Contact Us.
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