Why convert a mutual fund or ETF to a series trust

A multiple series trust provides a legal framework where a collection of fund companies operates under one umbrella trust with one board of trustees. Hundreds of funds-across both traditional mutual funds and ETFs-representing assets in the hundreds of billions use a series trust structure. Bringing together fund companies under a series trust shares the cost of administrative, legal counsel, accounting services, insurance coverage and other professional services.

Increasing fee pressures, rising distribution costs and regulatory complexity are just a few trends causing asset managers to critically evaluate product structures. Converting your mutual fund into a multiple series trust and taking advantage of an established board of trustees and lower expenses can result in significant annual savings to the investment adviser. In addition, for many investment advisers, the soft cost savings of better utilizing senior level personnel can be even greater than the value of the hard cost savings to the funds.

Following are some common questions about the use and benefits of series trusts.

What is a series trust?

A series trust, also known as an "open-end series trust" or "separate series trust," is a type of legal structure used to organize and operate multiple mutual funds under a single umbrella entity. It is a common structure employed by investment companies to offer a variety of mutual fund investment options to investors.

In a series trust, each individual fund is treated as a separate series or class of shares within the overall trust structure. The trust itself serves as the legal entity that holds and manages the assets of each fund. This structure allows for operational efficiencies and cost savings since administrative, legal, and regulatory functions can be shared across multiple funds within the same trust.

Does my fund company stay independent in a series trust?

Yes. As with a standalone structure, a fund company in a series trust operates its business under its own brand independent of the other series trust participants.

Why are fund operating costs lower in a series trust structure?

Funds that comprise the series trust enjoy shared economies of scale by having the trust procure and manage the following key relationships: board of trustees, legal counsel, auditors and chief compliance officer (CCO). In addition, certain expenses such as directors and officers (D&O) and errors and omissions (E&O) insurance, fidelity bond, legal counsel, CCO and trustees' costs are spread over a larger asset base. These allocated expenses are generally lower than a standalone mutual fund.

Can we implement a fee waiver if we use a series trust model?

Yes. Lower fund operating costs have the added benefit of potentially reducing the expenses of the fund, thereby reducing the fee waiver, if applicable, by the investment adviser. The reduction in expenses may allow the adviser to allocate the savings to other key fund initiatives that generate ongoing top-line revenue and boost overall adviser profitability.

How are fund management responsibilities shared?

As a result of the providers to the series trust assisting with the fund oversight, the responsibility for these tasks is shared by the investment adviser and the providers to the series trust.

For example, responsibility for certain compliance requirements, administrative testing, board management and SEC examinations is shared with the providers to the series trust and not solely with the investment adviser as in the case of operating a standalone fund company. Importantly, the many facets of regulatory compliance are driven by the providers steeped with mutual fund experience and a knowledgeable board.

Does a series trust model free up senior personnel?

Operating under a standalone structure can be a costly time drain on senior level personnel of the investment adviser. Given the regulatory framework in which funds operate, timeliness and accuracy become paramount in complying with the fund's organizational and operational requirements.

Compliance rules and regulations have become more complex and the inevitable SEC exam can impact a smaller fund company's operation. A series trust structure shifts some of these responsibilities to the providers to the series trust and can provide investment adviser personnel much needed time to concentrate on more strategic initiatives to guide the business.

Does being part of a series trust improve fund distribution?

Within the varying and changing requirements for acceptance by platforms, solely being a member of a series trust does not ensure dealer agreement acceptance, but the process may be easier and faster as a result of the fund's inclusion in the series trust. For example, if the dealer has already approved the series trust, the process of adding another fund from a review and operational perspective is rather straightforward.

This potential does not exist for many standalone trusts.

What does it cost to convert a fund to a series trust?

While there are costs associated with a fund conversion from a standalone structure to a series trust, a standalone fund can benefit by trading one-time conversion costs with ongoing savings. An experienced mutual fund administration partner can support you with established processes, conversion expertise and a cost-effective approach to conversion.

Learn more about how UMB can support your firm's registered and alternative investment fund administration needs, or contact us to be connected with a fund services team member.

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