What to Know About Direct Channels for Mutual Fund Distribution

Your plan is in place, your team has been assembled, and your investment objectives are set. You are almost ready to launch your mutual fund. Yet, before your fund enters the marketplace, you will need a distribution plan. How will investors find your fund? Who will be your target market? What will the purchase process look like? And who will be your key partners in this new market endeavor?

There are two distribution channels that can be used when launching a mutual fund. Investors can purchase fund shares directly from the fund company via the fund’s transfer agent or by using a fund platform — this is the Direct Channel. Alternatively, investors can enlist an intermediary such as a broker-dealer, bank, or registered investment adviser (RIA) to facilitate their mutual fund transactions — this is the Intermediary Channel.

A direct channel allows mutual funds to be accessed without intermediary assistance. The direct channel allows the investor to take control of fund selection and can also reduce the overall cost of investing. It may eliminate some of the fees that financial advisers and RIAs would charge. Investors can approach the direct channel in two ways: by filling out an application and submitting payment directly to the fund (known as the “check and app” process); or by using a fund platform.

“Check and App”

“Check and app,” like wirehouse, is a pre-digital term that is still widely used today. In the check and app process, fund purchases are initiated via an application filled out by the investor or intermediary. The investor sends the application, accompanied by a paper check, directly to the mutual fund company – hence the name “check and app”. Check and app is increasingly out of favor among investors, fund management, and investment advisers. Sending a check in the mail takes much longer than submitting payment electronically, which delays the investor’s purchase into the fund.

The process is also cumbersome during tax season when an investor must sort through various statements and tax forms sent separately from each fund family. From the fund management side, all this correspondence with individual investors is expensive, as are the marketing costs associated with attracting the general public’s attention.

Fund Platforms

The digital age version of the check and app process is the fund platform. A fund platform provides customers with an online marketplace where they can select from thousands of funds and other investment products and directly purchase those products via the intermediary’s online portal. In addition to the ease of buying online, fund platforms also allow investors to access their tax forms and account statements anytime online, all in one place. A fund platform’s customers can be individual consumers (direct channel) or financial institutions acting on behalf of their clients (intermediary channel).

There are two types of fund platforms – fund wraps programs and fund supermarkets. Fund wraps are online services offered to clients by their financial advisers to invest in a wide variety of mutual funds for one annual fee. Fund supermarkets are operated by large investment firms and offer individual and institutional consumers a “one-stop-shop” to purchase any extensive selection of funds.

Launching a mutual fund?

If you are looking to launch a mutual fund, then download our guide below. Our Mutual Fund Distribution Guide will show you the two channels of mutual fund distribution and introduce you to the key players. We will explain the different types of broker-dealers that participate in this process and how they work with advisers like you to attract and maintain investors. Along the way, we will also discuss aspects of the compensation, regulation, and strategy involved in launching and operating your fund.

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How we help

If you are ready to launch a mutual fund, then contact us today to get started.

ACA Foreside distributes over $1.1 trillion (about $3,400 per person in the U.S.) of mutual fund product for over 240 fund families through our broker-dealers. We serve as the legal underwriter for registered funds (mutual funds, closed-end funds, and ETFs) and placement agent for private funds. We provide our clients with an established broker-dealer framework and ongoing education to meet the changing SEC and FINRA regulatory landscape.

Once launched, we can further support you with our broad range of advisory, managed services, and regulatory technology solutions, to help you grow and protect your business, while also addressing your compliance, ESG, investment performance, and cybersecurity challenges.