AnALPSDistributors,Inc.Whitepaper

PracticalGuidetoEstablishingaMutualFundDistributionSyndicateFeb2016

SummaryThiswhite paper is intended to provide the readerwith a broad synopsis of keyconsiderationswhenattemptingtoestablisha“MutualFundDistributionSyndicate”in the “LiquidAlt”marketspace (“1940ActLiquidAltMutualFundSpace”). Thereare organizations that portray building a cost­effective Mutual Fund DistributionSyndicate as a simple Sunday drive or an all­too easy endeavor. However theinformation provided herein is intended to provide investment professionals anunderstandingofcertainfundamental issuestoconsiderinordertoassisttheminmaking an informed decision before entering Liquid Alt market space andestablishingaMutualFundDistributionSyndicate.OrganizationalAssessment–Strengths&WeaknessesWhen investigating the addition of the Liquid Alt space to your firm’s assetgathering channels, does your firm have clearly defined expectations about what“success” would look like? In order to answer this question, a detailed marketanalysis is required to establish reasonable expectations of a potential product’sabilitytogathersufficientassetsfortheproposedproducttobedeemedinternallyasasuccess.A firm should conduct a candid self­examination to identify its organizationalstrengths and weaknesses. The regulatory requirements imposed by theInvestment Company Act of 1940 (the “1940 Act”) are substantial for registeredinvestment advisers. However, one can take comfort in the fact that there areapproximately 20,000 mutual funds offered today with support services andoperational muscle readily available. Furthermore, alternative methods ofparticipatinginthe1940ActMarketSpacearealsoavailablesuchasparticipatingasa sub­adviser. However, suchmethods have their own respective advantages andchallenges.Startingamutual fund isa “Process”.One that requiresan experiencedpartner toassist you with the many hurdles and challenges that building a ‘distributionsyndicate” inthe1940ActMarketSpacewill require.Theremainderofthispaperwill focus on key considerations and steps of the “Process” that firms shouldendeavortoanswerwhenenteringtheLiquidAltmarketspace.

Planning–SelectingtheCorrectProductStructureCertain keyelementsofyourstart­up fund thatshould toberesolvedprior to theselection of any service providers and/or the final decision tomove forward areprovidedbelow.Ifthesekeyelementsarenotresolvedattheoutset,thecostcurvetoaddressanyshortcomingsorunresolvedmattersdramaticallyrises:

InvestmentConsiderations� Canthestrategybeimplementedgiventheregulatory

restrictionsaroundshortselling,investmentrestrictionsanddailyliquidity?

TargetMarket� Isyourfirm’smarketingcollateralpermissibleandisthe

nationaldistributionplanabletogrowandmaintainassets?

ProductStructure� Doesyourfirm’sshareclassselectionaddresstheneedsof

yourtargetmarket?

OperationalConsiderations� Doesyourfirmhavethefinancialresourcestosupport

distributionrelatedcosts(i.e.minimumfees;finder’sfeesandadvancecommissionpayouts)

RegulatoryConsiderations� Doesyourfirmunderstandthelimitationsassociatedwith

theuseofRule12b­1andnon­12b­1moniesforpaymentoffees?

Preparation–SelectingDistributionPlatformsAlmostanynationaldistributionplanwillinvolveexecutinganagreementwithoneor all of the major mutual fund distribution platforms and/or financialintermediaries(“FinancialIntermediaries”)thatcurrentlydominateaccesstoretailandinstitutionalinvestors.TheseFinancialIntermediarieshavegrownsopowerfuloverrecentyearsthattheynowhavetheirownuniqueentryrequirementsintothe1940ActMarketSpacetheyservice.Thesebarriersgenerallycomeintwoforms:

� the imposition of a “set­up” cost associated with operationally establishingnewstart­upmutualfunds;and

� the requirement of pre­existing demand for a new product from aninvestmentprofessionalwhoisutilizingthatspecificFinancialIntermediary’sservices.

These requirements burden start­up mutual fund products with the classicdilemma:“whichcomesfirst,thechickenortheegg? Inotherwords,howcanstart­upfirmsgathersufficientassetspriortogainingaccesstothehandfulofFinancialIntermediariesthatcurrentlycontrolvastmajorityofthe1940ActMarketSpace?The table below provides a sample of Financial Intermediaries start­up fees andeligibilitythresholds.

TypesofIntermediary Set­upCosts

GeneralEligibilityRequirements

Supermarkets

InitialSetupFee:$10,000.00PerFundSetupFee:$1,000.00MonthlyMinimum:$2,000.00BasisPoints:40bps(10bpsClassI)

Musthaveinsiderdemand.DuediligencecannotbeginuntilprospectusiseffectivewiththeSEC.Minimumof9to12weekstosetupposteffectivedateoftheprospectus

Wirehouses

InitialSetupFee:$25,000.00PerFundSetupFee:$2,500.00PositonCharges:$16perpositonAnnualMinimums:upto$250kperyear

Musthaveinsiderdemand,sixmonthsofperformancehistoryand$25millioninAUMbeforeduediligencewillbegin.

ClearingFirms

InitialSetupFee:$5,000.00PerFundSetupFee:$1,500.00AmendAgreementFee:$2,500.00MonthlyMinimum:$100.00

DependentonIntroducingBroker­Dealerdemandpostlaunch.

ConvictionandConfidence –TheMeasureofOrganizationalCommitmentOneofthecommondenominatorsthatALPShasseenculturallyacrossthosefirmswithwhichwehave partneredwith to successfullynavigate these challenges, is astrong conviction and persuasive narrative regarding the value of their strategy.These characteristics can be successfully communicated andmarketed through awidevarietyofmethodsofmessagingandbranding.Forexample,somefirmsmayleveragethereputationofaparticularportfoliomanager,whileotherfirmsfocusona unique investment process, where another will focus on branding itself as aboutiqueorspecialtyfirm.FinancialAdvisorsinthe1940ActMarketSpacemaybe

morelikelytotakeariskonastart­upfundwhichoffersacompellingreasonratherthanselectingapassiveinvestmentstrategythatmeetsanequivalentneed.In closing, conviction and confidence need to be authentic, demonstrable, anddeliberate. Support from Financial Advisors will be critical for your product tonegotiate each Financial Intermediary’s eligibility requirements. One of ALPS’clientswhich has successfully established a cost­effective 1940ActMarket SpaceDistributionSyndicatestatedinhindsight:“Therewerenoshortcuts”.

Performance–BestPerformersWillSellNow the good news ­ for firms that make the organizational commitment anddiligentlyworktoresolvethe“whichcomesfirst”dilemma,significantpositivecashflows canbe achieved. The chart belowdemonstrates that start­upmutual funds(the “Not Rated” category) for 2015 had positive cash flows in all six broadinvestmentcategories.

AnintriguingpieceofinformationdemonstratedinthischartiswhatALPSreferstoas the “Inflection Point”. As the readermay already know, Morningstar does notoffera “StarRating”untilamutual fundhasestablisheda three­yeartrackrecord.

The chart suggests that a mediocre rating has more negative impact on a fund’sability to gather assets than no rating. Therefore, those funds that can placethemselves in the top tier of their peer group can, with reasonable confidence,expecttoexperienceanetpositivecashflowasFinancialAdvisorswillgenerallyseethis as validation of the “conviction and confidence”messaging established at themutualfund’sinception.Partnership–ItReallyisaMarathonYourfirm’sflexibilitywillbechallengedbothorganizationallyandfinanciallybythe1940Act’sdemandinglearningcurve. Thisisthereasonwhytheselectionofyourservice providers is such a crucial part of the process. The best of breed in thisindustryaretheserviceprovidersthat:

� areflexibleandadaptabletoyourorganization’sspecificneeds

� complimentyourorganization’sstrengths

� provide ongoing assistance as your organization builds out its internal

expertise

� canaccommodatescaleasyourorganizationgrows;and

� culturallydefinetheirsuccessbytheirclients’success.

Inclosing,ALPSwould like tooffer fivequestions thatevery firmshouldconsiderwhendecidingtomoveintotheLiquidAltspace:

� Whatarethehurdlesthatcouldhinderourdistributionstrategyandhowwill

yourserviceproviderbeabletoaddressthese?

� Hasmyfirmcorrectlyaligneditsproduct’sfeestructurewithourfirm’starget

market(s)?

� Whatarethefinancialandnon­financialeligibilityrequirementsthatmustbe

metbeforeourproductcangainaccesstoourtargetmarket(s)?

� What are the economic costs to on­board our product to key mutual fund

distributionplatforms?

� How do we define the break­even point at which a key platform becomesprofitable?

This white paper is provided for informational purposes only, in order to equipthose firms considering moving into the 1940 Act Market Space to make well­informeddecisions.Hopefullyafterreadingthispaper,youwillagreethatbuildingasuccessful distribution syndicate is anything but a Sunday drive, and we hope itbetterpreparesyouforthejourneyahead.If your investment firm wishes explore any of these topics in greater detail ordiscuss opportunities, please contact James Curry at james.curry@alpsinc.com or720­623­2577.