Preface - as noted this weekend, I will be using the 'Fund FAQ/Pledge' tab at the top of this page as a place to update developments as they occur in the coming month or two. Therefore, if you are not a daily reader but an already committed or potential investor, you can jump there to see the latest progress at any time.
At the end of November I posted an update on a host of broker dealers investors were wishing to invest with and explained the situation and cost structure in dealing with many of these names. [Nov 30, 2010: More Fund Updates - Foreign Investors, Broker Dealers, Commentary on New Site, Direct Accounts] In the time since, I've done an email survey with with a group of about 60-70 investors to get a sense of how the original batch of money will be coming in.... and during that time we've received more info from some of the brokers were waiting on. Some updates on the brokerage situation below but first, a few related topics.
Once the SEC approves the fund, I can choose to turn it live at a later date. Since I am balancing people who will be investing direct via stand alone accounts with the mutual fund, and those who will be buying via brokerage I want the two time frames to cross as close as possible. Generally I have been told an approval on a brokerage platform will take 4-6 weeks, so my current thinking is to turn on the fund about 3-4 weeks after SEC approval. At that point the direct accounts can be opened immediately and all approvals by the brokers should be in the 6th inning or later.
Based on the survey I did with a moderate sampling size (I captured about 15% of the 450 or so pledges), about half will be creating direct accounts with the mutual fund, and half coming through a brokerage. I expect that to be atypical of the longer term trend (which I assume will be much more heavy on the brokerage side) but this mix that is more heavy to direct investments helps on our end in terms of not having to give away as much of the fund's expense ratio to the brokerages. If new to that topic see [Debating a 12b-1 Fee]
Specific to the 12b-1 fee, I will be going with a .25% rate to compensate for the changing nature of the market. However, that is a stated fee and need not be the actual fee, which can be lower (which I'd be very happy about). How so? Without getting deep into the making of sausage, every quarter the fund will accrue the 25 basis points (which can only be used for very specific items such as paying off the mafia fees to the brokers) but if they are not all needed they sit in a sidepocket until the next quarter, and the 12b-1 fee corresponds with the actual need that quarter.
Perhaps a little difficult to understand without numbers behind itm but to use the most simple of examples let us say we start with an empty mutual fund, and then during the first quarter of life half the accounts are direct with the mutual fund (which require no 12b-1 fees) and half open with a brokerage which require exactly 0.25% to list on that broker. So the average of the two is a 0.125% rate. That is all that would actually be needed and charged; the rest accrues for a future quarter, when it would be needed. So this is a net positive in the early going as we'll have substantial direct accounts (and Etrade accounts), but again my inclination is over the long run 75-80% (I am guessing) of monies will be coming via accounts in brokerages, hence the 12b-1 will kick in closer to its maximum over time. Long story short, the lower this number the best for all of us since it's basically the fee we pay so no one visits our laundromat and knocks out some windows at night... if you know what I mean.
On to the broker dealer situation. I have a lot of one offs people requested (a broker 1 or 2 people asked about), which I either addressed in the piece at the end of November, or I emailed back specifically to that 1 person the situation. A few still sit outstanding such as Bank of America which the group working on this for me has not heard back from - but I want to focus on the 'mainstream' names.
To review, for many months I told everyone we'd list at Scottrade, Ameritrade, or Etrade as the fees were low there ... and we would not list at Fidelity or Schwab due to the fee structure to be in their supermarkets. I set my overall budget that way as well, assuming I I'd have nominal up front costs on the broker side and could devote monies for many other things - such as opening in a large amount of states. At the time Interactive Brokers and Vanguard were not on my radar, but those are larger broker / supermarkets quite a few people have inquired about. Unfortunately, my long held guidance was inaccurate and the landscape has changed substantially in 2010 (and continues to seemingly monthly). Hence the costs also change (both up front and ongoing), so based on what makes sense economically along with pragmatically what makes sense in terms of future investors, is the path I am using. Let me make clear this point, I have to submit an application for approval on any of these platforms and while the fund should be approved, there is no guarantee - any or all could (in theory) reject the application, but assuming all say yes this is my framework:
(easy color code - green yes, red no, purple TBD)
(1) Etrade - no change from November update, confirmed there have been no changes and remains the only 'low cost' provider requiring no up front entrance fee or taking away of expense ratio. Only commissions must be reimbursed by fund. How long this lasts I don't know, but hopefully it does not change in the next 2 months.
(2) Fidelity - no change from last update; up front listing fee is mid 5 digits along with very large take away of expense ratio (40 basis points) - end of discussion. At some point if there is enough organic investor demand calling customer service asking for the fund to be in their supermarket, then I hear they potentially will negotiate. But that's a subject for another year. Or decade.
(3) Interactive Brokers - this company is completely unresponsive to repeated queries by multiple people. Can't have a discussion with them, if they don't return a single call placed over 3 weeks. I've asked the back office team to continue to try but frankly it's unprofessional and judging from funds listed on their site - they could care less about small fry. They only have 15 fund families and aside from 1 fund of $400M all the rest are the huge names like Fidelity, Janus, AmericanCentury, PIMCO, T Rowe Price . So in summary, we tried (and tried, and tried) to talk to them - they don't respond. If they did respond -- the chances of being listed seem slim. Plan accordingly, although Hail Mary pass is an option. Won't give up until I get a firm no. ;)
(4) Vanguard - received further detail on their structure since November update. Similar expense ratio takeaway (35 basis points, offset in part by the 12b-1) to Fidelity, but up front listing fee a few thousand. Vanguard offers a No Transfer Fee (NTF) option and a Transfer Fee (TF) option - both actually are quite hefty on the expense ratio takeaway, so the cost savings to the TF option barely offsets that of the NTF option, so I'm deciding to pay the extra out of pocket and go NTF on Vanguard. Advisory firm (me) will eat 10 basis points for any investor who goes via Vanguard route.
(5) Charles Schwab and Scottrade - as explained in November entry, Scottrade has essentially outsourced their mutual fund operations to Schwab. So in theory, if you list at Schwab you *should* have access on the Scottrade platform - although it appears to be a separate application. (I will find out in the coming months how accurate the theory is).
Schwab's main fund platform (supermarket) is called OneSource - a ton of bells and whistles if you list there (the fund is eligible for all their screens, their special selections etc), and investors get to buy funds No Transfer Fee (NTF) - but it is massively expensive. Not only do they take the 40 basis points of expense ratio but unlike my previous assumption of an upfront fee they charge an annual flat fee. I won't even bother to go into the figure other than to say in a decade you'd pay substantially over a quarter of a million on the annual flat fee alone. Not an option in my world, and my long term plan is similar to Fidelity - if the fund some day hits critical mass and enough customers of Schwab call and ask why the fund is not available on OneSource then maybe they are open to negotiation per sources I've talked to. Also, you need to be listed in all 50 states for OneSource so it's a non starter on about 5 fronts.
That said, Schwab has a Transfer Fee (TF) option, in which you lose all the bells and whistles and they like to put you in a dark corner of their platform. But you are there, and a convenient option for Joe6Pack investor who shows up in the future and has an existing Schwab account. Up front fees are substantial (but less than Fidelity) and they still take away a good piece of expense ratio, but no annual flat fee like in OneSource. Also you need not list in all 50 states in the TF option. Since Schwab is one of the big 2 supermarkets for mutual funds AND the fact the fund can be listed in both Schwab and Scottrade (2 birds, 1 stone), I will be applying to get the fund on their transfer fee platform. To buy you will need the 5 letter symbol of fund, since otherwise it will be near impossible to find.
That leaves the issue of (6) TDAmeritrade - they also have created a system with an up front substantial fee and taking away expense ratio - mimicking the Schwab / Fidelity / Vanguard model. If the up front fee for Ameritrade was lower, I'd be more than willing to list but at this time paying up front fees at Vanguard, Schwab (and maybe Scottrade) does not allow for the substantial nut Ameritrade also requires. I am hoping to negotiate with Ameritrade to see if I can get the upfront fee lowered, but at this point until SEC approval, I have no product to even wave in their face - I simply am going to offer that I have a retail base of investors who are 'do it yourself' types (some of which already switched to Ameritrade based on my advice), hence they have a business opportunity. I put a call in early this week, and thus far silence. I expect any conversation of merit would have to happen after SEC approval. But maybe they ignore me - again, we're a tiny fish in a big ocean.
In summary, my original budget situation did not really allow for any of these costs as I assumed I'd get on the before mentioned 3 brokers without pain. So I've had to take on a not small additional cost to create any of these brokers (save Etrade) as an option for investors. However, being a start up I can only pay for so many. The 'traditional' mutual fund investor is going to be found at Fidelity, Schwab, or Vanguard - whereas the Etrade, Scottrade, and Ameritrade are more catering to the 'do it yourself' person who is stock oriented and maybe has a fund or three on the side. (but also happens to much of the reading audience at FMMF) Hence, within the budget if it came down to a Schwab-Scottrade combo versus say Ameritrade, it's a no brainer from terms of where future mutual fund investors will be coming from, and listing at 2 brokers versus 1. With that said, I do want to get listed with Ameritrade (in part because I told people to go there for 6+ months) and if they are open to discussions for negotiation will circle back before launch. Otherwise it will have to be another year.
Any questions feel free to email. As always thanks for your patience during this long and winding road with myriad stumbling blocks. Getting closer...indeed I see a future fund family logo ahead....