Wrap Sponsors are Restructuring the Mutual Fund Wrap Product
THE NEXT GENERATION MUTUAL FUND WRAP PROGRAMS
IN FOCUSProviding industry insight into market
trends, best practices, and service solutions
INVESTOR DEMAND DRIVES PRODUCT DIFFERENTIATIONThe traditional mutual fund wrap program involves the allocation of the sponsor’s customer assets across many different,
third party mutual funds. This traditional wrap structure provides professional management and daily liquidity to both the
sponsor and the investor. However, investors are seeking lower product expenses, greater tax efficiency, and, ultimately,
better performance. The use of external mutual funds challenges the wrap sponsor in several ways:
» Cost Economies – Although the wrap sponsor places assets with third party mutual funds, the sponsor has no
control over the expense ratios of external third party mutual funds.
» Allocation Efficiency – As wrap programs become significantly larger, allocations and rebalancing of large sums of
assets to/from third party mutual funds creates difficulties for both the sponsor and external mutual funds in terms
of costs, timing, and coordination.
» Tax Efficiency – External mutual funds incur daily subscriptions and redemptions from all shareholders, requiring
the manager to buy and sell portfolio securities to manage cash inflows and outflows. This portfolio turnover may
impact both taxes and expenses of the third party fund.
THE NEW MUTUAL FUND WRAP MODELA potential solution to these challenges for the mutual fund wrap sponsor may be to establish its own wrap sponsor mutual
fund family with the wrap sponsor as the investment manager to the mutual funds. The wrap sponsor selects and manages
third party sub-advisers for all asset management functions. This structure allows the wrap sponsor to directly manage and
control all aspects of the underlying investments, as well as the allocation of client assets across investments and managers.
POTENTIAL BENEFITS OF A WRAP SPONSOR MUTUAL FUND FAMILY
» Lower Investment Expenses – Depending upon the third party mutual funds involved in the traditional wrap allocation program, there is potential for significantly lower investment fund and overall wrap program expenses, perhaps 15-30 basis points or more, depending upon the program. These cost savings are typically derived from lower investment management fees and fund expenses generated through the economies of scale in the sub-adviser model. In addition, third party funds typically are designed for multiple distribution channels, and can include many fund expenses not applicable to the institutional mutual fund wrap product. The wrap sponsor can determine the expense structure of the wrap sponsor mutual funds, including management fees, operating expenses and total fund expense level.
» Investment Management Oversight – As the investment manager to the mutual funds, the wrap sponsor designs each mutual fund investment strategy, determining the investment objective and principal investment strategies for each fund, including diversification, specific allowable investments, and risk considerations. Within the wrap sponsor’s ongoing investment management responsibility, the selection and oversight of sub-advisers provides the wrap sponsor with greater involvement in the management of each mutual fund investment in the wrap program. The wrap sponsor also has more direct oversight and control of underlying investment performance of each sub-adviser, including daily transparency into portfolio activity, securities, and sub-adviser performance.
» Improved Allocation Efficiency – The wrap sponsor mutual fund model allows for more efficient investment allocation and rebalancing. A large redemption from a third party mutual fund can create significant liquidity and tax issues for the third party fund and its investors due to the necessity to liquidate securities on short notice. The sub-advised mutual fund model allows the wrap sponsor to efficiently reallocate investor assets to a new or different sub-adviser with significantly less impact to the investor.
» Investor Tax Efficiency – Greater control over the mutual fund investment management process in the wrap sponsor mutual fund program allows the wrap sponsor to effectively manage the tax efficiency of each portfolio as necessary. Employing a sub-adviser model allows the wrap sponsor the ability to allocate and rebalance across sub-advisers within a portfolio without necessarily creating a taxable transaction for the investor.
2
The traditional wrap program sponsor performs two valuable services for the investor – selection of appropriate third
party investment managers, and allocation of customer assets across these managers. In the selection process, the wrap
sponsor conducts significant due diligence of the underlying mutual fund(s) and investment manager(s), including review
and documentation of the manager’s compliance program, Form ADV, regulatory history, business continuity plan, code of
ethics, organization structure and resources, investment philosophy, investment performance, etc. This process is essentially
the same as the due diligence required of the investment manager in the selection and oversight of sub-advisers of the wrap
sponsor mutual fund. Consequently, in the sub-advised wrap sponsor fund family, the wrap sponsor continues to perform all
sub-adviser investment manager due diligence, while at the same time remaining in an independent oversight role of the daily
investment activities.
TRADITIONAL VS. NEXT GENERATION WRAP PROGRAM
3
PROPRIETARY MUTUAL FUND WRAP PROGRAM – THE BASICS The process to launch a wrap sponsor mutual fund product line involves the selection of a business partner experienced in
establishing and operating mutual funds. The wrap sponsor will want to make several key decisions regarding the launch and
migration of assets to the proprietary mutual funds. Sample key considerations for the wrap sponsor in developing a wrap
sponsor mutual fund model include the following:
Mutual Fund StructuresThe wrap sponsor will select the most advantageous mutual fund structure from the following three options (see table for
a detailed description of each). The wrap sponsor controls investment management and branding in all options.
» Series Trust – A “series trust” is an existing SEC registrant (“Trust”) with all infrastructure and service providers in
place. The administrator establishes a “series”, or fund, for each wrap mutual fund product. Benefits include cost
economies, faster time to market for fund launch, and the wrap sponsor’s ability to leverage existing expertise from
the Board, service provider, fund officers, and CCO.
» Proprietary – The wrap sponsor establishing their own “proprietary” mutual fund family trust will assemble the Trust
board, service providers, CCO, officers, etc. Although a new trust launch will take generally one to three months
longer, the wrap sponsor can be represented on the Trust board and is involved in all aspects of launching and
operating the Trust. The administrator will assist in all aspects of the Trust formation.
» Hybrid – The “hybrid” model is the formation of a proprietary trust and combines many of the series trust elements
of a fund launch with the wrap sponsor’s selection of service providers, Trust officers and Trustees, including
representation, if desired, of the wrap sponsor on the Trust board. The administrator will assist in all aspects of the
Trust formation.
Investment Adviser ResponsibilitiesThe wrap sponsor, as the investment manager to the mutual fund trust, will be responsible for all aspects of investment
management, including sub-adviser selection, due diligence, board reporting, and compliance. As investment manager
to the Trust, the wrap sponsor is reviewed and approved annually by the Board of Trustees, requiring transparency and
regular reporting of the Adviser’s processes for performance management, portfolio compliance, adviser compliance,
sub-adviser management, etc.
Sub-Adviser ResponsibilitiesThe sub-adviser responsibilities to the Trust, Adviser, and Trust board include investment management and compliance
with all applicable SEC 1940 Act, Internal Revenue Code, prospectus, and SAI investment policies and procedures. In
addition, mutual fund sub-advisers are responsible for providing daily and periodic requested portfolio and compliance
reporting to the investment manager and trust, as well as to the trust and investment manager CCO’s.
Fund Investment StrategiesThe wrap sponsor, supported by the administrator, will design mutual fund portfolios to align with the investment
strategy allocation requirements for their wrap program, creating sleeves within each portfolio for each sub-adviser, and
complementary strategies to meet the sponsor’s allocation models.
Fund Expense StructureThe wrap program sponsor will determine the expense structure for each mutual fund, including management fee
and total fund expense ratio, including fund expense caps, if desired. The administrator will develop fund expense
projections to model all mutual fund costs based upon projected fund assets.
4
Migration of Client AssetsThe wrap fund sponsor and the administrator will coordinate the client communication and transition from third party
funds to proprietary mutual funds. This process generally involves coordination of wrap program documentation, timing
the liquidation of third party funds, and coordination of investor assets into the wrap sponsor mutual funds.
MST FUND STRUCTURES*
Trust Structure: Multiple Series Trust (MST) Proprietary Hybrid
Description: An MST is an existing open-end SEC registered investment management company consisting of a series of mutual funds managed by unaffiliated investment advisers. Each fund is a separate “series” or separate portfolio within the Trust, allowing multiple, unaffiliated advisers to gain economies of scale within one fund complex, sharing a common Board, independent trust legal counsel, audit firm, and service providers.
A proprietary trust is typically established specifically for a single investment manager’s product line and distribution strategy. The investment manager takes the lead in organizing the Trust and is actively involved in the daily operations and administration of the Trust and the Trust Board meetings.
The hybrid model combines service components to create a proprietary trust for a single investment manager, leveraging external resources. U.S. Bank takes the lead in organizing the Trust and works in conjunction with the investment manager for their specific needs and preferences.
Fund Board of Trustees:
In place, with mutual fund industry experience; the mutual fund Board generally includes an interested Trustee affiliated with the administrator.
Generally selected and recommended by the investment manager; the mutual fund Board generally includes an interested Trustee affiliated with the investment manager.
U.S. Bank and investment manager collaborate to create candidate pool, candidate interviewing, independence verification, etc. Final selection by manager.
Fund Officers (President, Treasurer, Assistant Treasurer, Secretary):
In place, provided by the MST, approved by the Trustees; generally employees of the administrator.
Generally selected and recommended by the investment manager, approved by the Trustees; generally employees of the adviser.
Provided either by U.S. Bank or third party partner.
Investment Manager Role:
Fund manager, approved by Board of Trustees.
Fund manager, approved by Board of Trustees.
Fund manager, approved by Board of Trustees.
Service Providers: (Administrator, Accountant, Custodian, Transfer Agent, Distributor)
In place, provided by the MST, approved by the Trustees. U.S. Bank Legal Administration.
Generally selected and recommended by the investment manager, approved by the Trustees. U.S. Bank Legal Administration.
U.S. Bank and affiliates, approved by the Trustees. U.S. Bank Legal Administration.
Trust Independent Legal, Independent Audit
In place, provided by the MST, approved by the Trustees.
Generally selected and recommended by the investment manager, approved by the Trustees.
U.S. Bank recommendation, investment manager collaboration/final selection, approved by the Trustees.
Trust Chief Compliance Officer:
In place, provided by the MST, approved by the Trustees.
Generally selected and recommended by the investment manager, approved by the Trustees; commonly performed by the adviser CCO staff.
Either investment manager CCO or U.S. Bank third party partner.
Estimated Time: Generally 100-120 days. Generally 150-180+ days. Generally 150-180+ days.
Mutual Fund Branding and Active Distribution:
Determined and provided by the investment manager.
Determined and provided by the investment manager.
Determined and provided by the investment manager.
* The services provided by U.S. Bank and its affiliates are shown on page 6.
5
WRAP PROGRAM MUTUAL FUND OPERATING STRUCTURE A mutual fund trust operates with a standard infrastructure composed of a Board of Trustees, service providers, independent
legal counsel, and independent audit firm, with investment services performed by the investment manager pursuant to an
investment agreement with the Trust.
MUTUAL FUND OPERATING STRUCTURE
EMERGING TREND IN MUTUAL FUND WRAP PROGRAMS The migration of mutual fund wrap programs into wrap sponsor mutual funds provides the wrap sponsor with significantly
more control over the investment policies, asset management, and costs of the underlying investments within their wrap
program. The wrap sponsor continues to maintain independence from the daily portfolio management, which is delegated to
the sub-advisers. The wrap sponsor can continue to actively manage the selection and network of investment management
firm sub-advisers, but has the added benefit of directly overseeing the underlying mutual fund products as well. Thorough
analysis is required to determine the economic benefit to the investor, the appropriate transition process specific to the wrap
program, as well as the impact to the wrap sponsor.
This analysis is not an all-inclusive evaluation of mutual fund wrap programs. U.S. Bank will determine specific impact to the wrap sponsor on a case by case basis.6
For more than 46 years, U.S. Bancorp Fund Services, LLC has leveraged specialized experience across our organization
to provide seamless service solutions for our clients regardless of the complexity and depth of their products. With
client relationships lasting since our inception in 1969, we know the foundation for strong relationships is built on open
communication, trust, and accountability. Our managers and professionals will deliver the amount of support, guidance,
and insight into the market our clients need to be successful.
Bob Kern is a Managing Director and Executive Vice
President of U.S. Bancorp Fund Services,
LLC. He began his career with U.S. Bancorp
in 1982 and has served as a manager within
the fund services subsidiary since 1984. From
1984 to 1994, Mr. Kern managed business
development efforts as well as the mutual
fund Transfer Agent operation including the
Investor Services group, Account Services,
Legal Compliance, Document Processing,
and Systems Support divisions. During that
time, Mr. Kern assisted in the management
and implementation of both services and
technologies related to Transfer Agent and
Shareholder Services, Fund Accounting, Fund
Administration, literature fulfillment, and fund
Distribution services.
Education and CredentialsMr. Kern received his undergraduate degree
from Marquette University in business
administration with specializations in finance
and marketing. Mr. Kern serves as a board
member of U.S. Bancorp Fund Services,
LLC, Quasar Distributors, LLC, and interested
Trustee and Chair of Managed Portfolio Series,
an open-end mutual fund multiple series trust.
ABOUT US
“Through more than
46 years of continually
enhancing our fund
services, and by working
with our clients to grow
their business, we are
fortunate to support more
than 30 percent of all
mutual fund complexes.”
ABOUT THE AUTHOR
7
Visit usbfs.com for additional white papers and case studies or call 800.300.3863 for more information about
our comprehensive suite of services.
Headquartered in Milwaukee since 1969, U.S. Bancorp Fund Services, LLC currently provides services to 518 mutual fund and alternative investment clients with 3,184 portfolios and aggregate assets of $930 billion. U.S. Bancorp Fund Services’ clients include mutual funds, investment partnerships, hedge funds, separately managed accounts, fund-of-funds, and offshore funds. It is a subsidiary of U.S. Bancorp, the fifth largest bank in the United States with assets of $419 billion, NOTED IN THE SECOND QUARTER 2015 CORPORATE PROFILE.
U.S. Bancorp Fund Services, LLC is a subsidary of U.S. Bank, N.A., the fifth largest commercial bank in the United States and an affiliate of Quasar Distributors, LLC. Quasar Distributors, LLC, a wholly owned subsidary of U.S. Bancorp, underwrites and distributes mutual funds and is a FINRA member firm. U.S. Bancorp is the parent company of U.S. Bank, N.A. U.S. Bank, N.A. does not guarantee the products, services, or performance of its affiliates and third-party providers.
© 2015 U.S. Bancorp Fund Services, LLC. All rights reserved.101315
