I thought based on some questions I receive in the mail, and the basis of this website I should have at some point in the past delved into the structure of mutual funds. Frankly, I did not know the information below when I first started this journey even having been a mutual fund investor for many years. This might also help alleviate some concerns for those who are considering a direct investment in the fund; thinking they are sending the money to some address in the Cayman Islands. ;) I will actually link to this post in the FAQ portion of the website because it addresses something most people don't probably realize.
When one broadly speaks of a specific mutual fund there are actually 2 arms length companies that make a mutual fund operate. I am guilty of mixing them myself when I speak, simply saying my fund. It's not that simple.
First is the mutual fund itself; which is an independent trust. The fund has trustees - of which I am one, but 2 are independent. You can have more than 3 trustees, but whatever the case you need a majority independent.
Second, there is an advisory who is employed by the mutual fund to manage the portfolio. Obviously going into this I had neither the fund, nor the advisory firm so really there are 2 projects going on behind the scenes at once - the formation and buildout of infrastructure of both entities; with all the work that entails.
The advisory company is employed by the mutual fund to manage the portfolio. So it's an arms length relationship. In theory if I stunk for a long time as a manager, the fund could fire the advisory firm (that decision is by the trustees).
Therefore, when an investor opens a direct account it has nothing to do with me (the advisory firm). It goes to a custodian (a bank) that the mutual fund trust is attached to. In this case Union Bank in San Francisco.
At the end of each month the fund spins off revenue. And expenses. A portion of expenses are management fee, and a portion are operations, but net net it's one big line item expenses. The net of the two (revenue v expenses) is either positive or negative. Hopefully positive. If it is negative then I am liable for the excess costs - even though I am an independent advisor to the fund. That's just the way it works in a small independent fund. Which is the main reason for having the pledge sheet and making sure the investor base is reliable and you can count on it. If the new of the two is positive the manager makes money, and we all live happily ever after. But that's the only money the advisory sees... revenue - expenses. It has nothing to do with the investor's money which goes to the bank, and is attached to the mutual fund.
There is a good (short) summary that frames it here.
As an aside, all these issues lead to complications with the 'commentary' (blogging) I am planning in the future. There is little precedent first of all, and you are mixing 2 different types of firms with 2 different regulators. In terms of day to day communication, there is no real framework as only a handful are even trying to make this type of commentary part of their business. And the few that do, approach it completely differently. It gets complicated from there, but I won't bore you with the details - needless to say, thinking out of the box is frowned upon by our regulators.