Key Takeaways
- Third-party distributors sell mutual funds for fund management companies without direct affiliation.
- They typically offer unbiased advice due to their independence from fund companies.
- Partnerships with distributors often include numerous fees like sales charge commissions and trailer fees.
- Distributors help mutual fund companies save on costs associated with marketing and building sales teams.
- Examples include Eaton Vance Distributors and Vanguard Marketing Corporation, which handle fund distribution.
What Is a Third-Party Distributor?
A third-party distributor is an independent institution that sells mutual funds to investors on behalf of fund management companies, without a direct connection to the funds themselves. Their independence allows them to offer generally unbiased product choices, while their partnerships with fund companies often involve fees and specific arrangements. They also provide investors with wider access to a variety of mutual fund options.
How Third-Party Distributors Operate
Third-party distributors partner with investment companies to sell mutual funds. Third-party distributors typically have comprehensive domestic and international sales teams in place to distribute the investment company’s mutual funds. Distributors also have a broad sales network and expertise in mutual fund distribution.
There are numerous fees associated with partnerships between third-party distributors and mutual fund companies. The distributor usually receives sales charge commissions for selling the investment company’s mutual funds as well as a portion of the trailer fees associated with the fund. A mutual fund’s operational fees will also include a marketing expense paid to the distributor. Other fees that a distributor can charge a mutual fund include networking fees, due diligence fees, platform maintenance fees, and administrative fees.
Depending on the cost structure, these fees can be worth it to a mutual fund as it removes the time and cost of seeking out new clients and hiring a sales team that comes with the cost of salaries and benefits. In the end, it depends on the margins between the two options or finding an optimal balance between the two.
Fast Fact
A 12B-1 fee is the primary fund fee associated with the marketing and distribution of the fund. The 12B-1 fee is an annual marketing and distribution fee paid to the distributor.
One of the benefits of using a third-party distributor is its apparent independence from mutual fund companies. As a third party, the distributor can provide unbiased recommendations to investors without favoring one particular product over another. This could result in potential investors receiving the best advice suited to their needs rather than a mutual fund selling itself to hit sales targets.
Fund managers generally try to sell the products of their own companies, but with a third party, investors may get access to a wide range of products across many different companies. The only catch, as noted above, is the higher fee structure that may come with using these distributors.
Key Functions of Third-Party Distributors
Third-party distribution partnership agreements vary across the industry. Many third-party distributors also provide a range of services that support mutual funds.
As a distributor, the firm works with the investment company to build a marketing plan for the distribution of the mutual fund. Third-party distributors typically work with employee distribution representatives with global distribution networks. They can be responsible for selling individual funds and work with brokerages to ensure the distribution of funds through electronic brokerage trading platforms.
In some cases, a company may build its own third-party distribution unit to partner with the investment company for the distribution of mutual funds. Independent distributors also exist with a range of service offerings for mutual fund companies.
Leading Third-Party Distributors in the Industry
Eaton Vance and Vanguard are two mutual fund companies that have built distribution units for selling mutual funds. Eaton Vance Distributors serves as the distributor for Eaton Vance mutual funds. The Vanguard Marketing Corporation is the distributor for the Vanguard mutual funds.
ALPS Distributors is one of the mutual fund industry’s leading independent distributors. ALPS provides distribution and broker-dealer services for a wide range of mutual fund companies. Its clients range from startups to large, well-established fund companies. It has expertise in distributing a wide range of product types including open-end funds, closed-end funds, unit investment trusts, exchange-traded funds (ETFs), and private placements.
The Bottom Line
Third-party distributors act as independent intermediaries that broaden investor access to mutual funds through extensive networks and partnerships, though this convenience often comes with added fees. Examples range from in-house distribution arms at firms like Vanguard and Eaton Vance to specialized independent providers such as ALPS Distributors.