Wednesday, November 14, 2007

Mutual Fund Distribution USA 2003

SEI, which manages a $78 billion portfolio, deals almost exclusively with registered investment advisers who operate as independent regional broker-dealers. The investment company currently does business with 8,500 advisers nationwide. Dellorfano emphasized that SEI's goal is not to increase the number of intermediaries it works with, but rather to double or triple their business through these same advisers.


Mutual Fund Distribution USA
A Review by ICI, USA

In the past 25 years, there have been dramatic
changes in how mutual funds are sold to the
investing public. Before 1980, Most funds were sold
through a broker, who provided advice, assistance,
and ongoing service to the fund buyer. The shareholder
paid for these distribution services through
a front-end sales charge when he or she bought the
fund. Other funds sold shares directly to investors
without a sales charge. Investors in these funds
either did not receive advice and assistance or
obtained and paid for these services separately.

Funds sold through financial professionals such
as brokers have since adopted alternatives to the
front-end sales charge. The alternative payment
methods typically include a fee based on assets
that may also be in combination with a front-end
or back-end sales charge.

In many cases, funds offer several different share classes — all of which
invest in the same underlying portfolio of assets,
but each share class may offer shareholders
different methods of paying for broker services.

In addition, the range of venues (or distribution
channels) through which an investor can purchase
fund shares has expanded since 1980, and each
distribution channel may offer different services.

As a consequence, companies sponsoring mutual
funds have created new funds and share classes
that have costs reflecting the different distribution
services. With the expansion in distribution
channels, many fund sponsors have abandoned
earlier, single-channel distribution strategies in
favor of multi-channel distribution. As a result,
mutual fund sponsors that once marketed
exclusively through a single, traditional
distribution channel — a sales force or directly to
investors — often now compete head-to-head in
the same distribution channels.

The changes in fund distribution have been
accompanied by a significant decrease in the
average cost of distribution services incurred by
mutual fund buyers. The decline in distribution
costs reflects a variety of developments, including
competition between mutual funds, expansion of
the 401(k) plan market and other markets with
low distribution costs, and increased availability
of lower-cost advice to investors.

Distribution of Mutual Funds

Currently Mutual funds are sold through five principal distribution channels:
(1) the direct channel,
(2) the advice channel,
(3) the retirement plan channel,
(4) the supermarket channel, and
(5) the institutional channel.

 The first four channels primarily serve individual investors. In the
direct channel, investors carry out transactions directly with mutual
funds. In the advice, retirement plan, and supermarket channels,
individual investors use third parties or intermediaries that conduct
transactions with mutual funds on their behalf. Third parties also
provide services to fund investors on behalf of mutual funds.

 The most important feature of the advice channel is the provision
of investment advice and ongoing assistance to fund investors by
financial advisers at full-service securities firms, banks, insurance
agencies, and financial planning firms. Advisers are compensated
through sales loads or from asset-based fees.

 The retirement plan channel primarily consists of employer-sponsored
defined contribution plans in which employers provide mutual funds
and other investments for purchase by plan participants through
payroll deductions.

 The supermarket channel is made up of discount brokers that offer
mutual funds from a large number of fund sponsors. Many of the fund
offerings are subject to no transaction charges or sales loads.

 Businesses, financial institutions, endowments, foundations, and
other institutional investors use the institutional channel to conduct
transactions either directly with mutual funds or through third parties.

Capital Structure
 The capital structure of mutual funds has changed over the past two
decades from solely single-class funds to a mixture of single- and
multi-class funds. The majority of funds are now multi-class.

 The change in capital structure partly reflects the broadening of the
distribution system. In particular, the multi-class structure enables
funds to offer different distribution and service arrangements to
investors with differing needs. As a consequence, investors benefit by
obtaining preferred distribution arrangements typically at a lower cost.

 Because each share class is part of the same portfolio, investors
benefit from the economies associated with the management of a
single portfolio. Each share class is charged the same base fee for the
management of the fund. Differences in fees, expenses, and sales
charges reflect differences in the distribution and service arrangements
available to investors in a particular share class.

 The vast majority of funds sold through full-service brokers in the
advice channel have multi-class structures. The most common use
involves a group of three classes — A, B, and C
shares — that are sold to individuals through
stock brokerages. Each share class offers a
different method for compensating brokers
for advice and assistance. Class A shares rely
primarily on front-end loads, whereas class C
shares predominantly use asset-based, 12b-1
fees. Class B shares combine 12b-1 fees with
declining contingent deferred sales loads that
are triggered by redemptions. Each mutual
fund investor chooses a share class based on
individual circumstances, particularly his or her
investment horizon.

 Other important share classes include an
institutional share class for defined contribution
plans and institutional investors, and an
adviser share class that is sold through financial
advisers who charge their clients directly for
advice and services.

 Fund companies that sell funds directly to
shareholders typically offer a distinct share class
or fund for these direct sales. Fund sponsors
that sell directly to retail clients might also offer
separate share classes to institutional clients and
financial advisers.

Distribution Cost
 Distribution cost — the combination of sales
loads and 12b-1 fees incurred by buyers of
mutual funds — decreased 60 percent for equity
fund share classes with loads and 43 percent
for bond fund share classes with loads between
1980 and 2001.

 Distribution cost fell as load share classes were
sold with greater frequency in retirement plans
and other accounts that reduce or waive the
load. The decline in cost of purchasing load
share classes was also partly in response to
competition from no-load fund companies.
To meet the competition, load funds reduced
front-end sales loads in the 1980s and offered
lower-cost alternatives to front-end loads.

 For the mutual fund industry as a whole,
distribution costs fell as sales of no-load share
classes increased through the direct, supermarket,
and retirement plan channels. Thecombination of lower distribution costs among
load share classes and increased sales of no-load
share classes caused overall distribution costs
to fall by 73 percent for equity funds and 60
percent for bond funds between 1980 and 2001.

 Since the adoption of Rule 12b-1 in 1980,
asset-based distribution fees have become a
significant element of distribution cost. In
2001, 12b-1 fees represented an estimated 48
percent of all distribution costs for equity fund
load share classes and 49 percent for bond fund
load share classes. The use of 12b-1 fees has not
offset reductions in sales loads, however.

Extracted from

The paper has 20 paages.

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