Hiring a 3rd party wholesaler: worth the effort?

by Katie Bird

Katie Bird

As a mutual fund manager seeking ways to grow your fund, you may have considered working with a third party wholesaler. It’s a big decision, no doubt—putting your fund’s reputation in the hands of someone else can seem daunting. However, you should think of a third party marketer as a teammate, and if you do your homework and ensure the distribution group’s goals align with yours, it should make for a harmonious team.

To help you make the best decision, we went straight to the source and spoke with two wholesalers. Ed Oberholtzer is President and Relationship Manager for Foxhall Capital Management and has been an expert in the distribution industry for over 30 years. Russell Adams is Founder and Managing Director at Piedmont Capital Distributors, a recently launched national marketing firm focused on the needs of boutique and middle-market asset managers.

Is third party marketing a good fit for your firm?

Both Adams and Oberholtzer agree that just about any firm should consider a third party group. As long as your firm has a successful operating history and is ready to embrace the challenges associated with third party distribution, Adams feels you can surely benefit from the partnership.

“Managers need to get a sense of the firm’s capabilities and what channels they are most proficient among,” Adams advises. You need to be sure the marketing firm specializes in your audience’s channels. If their presentation falls on deaf ears, it will do you no favors. While many third party distributors have some experience in several different channels, Oberholtzer notes that it’s unlikely you’ll find one individual who can call himself an expert in every channel. Also, check to see if the firm is already promoting a fund similar to yours. “You want to have a thorough knowledge of what the group has on their plate to distribute,” says Oberholtzer. It’s definitely not a recipe for success to have to compete with a fund they are already marketing. However, Oberholtzer points out that there is an advantage in hiring a third party group that promotes several fund classes to ensure their breadth of expertise. The more compelling stories they have to tell, the more likely they can get in the door to sell your fund. “I want to look for other good products for my product to sit beside,” he adds.

How important are references?

Making the best selection requires you to pull back the curtain and take a close look at the company. Oberholtzer suggests requesting a list of other firms doing business with them and calling everyone on the list for personal references. He advises speaking with former employers and personally checking the broker-dealer registration paperwork of every candidate. Adams agrees and believes that as a manager, you should commit to regular conference calls and some joint calls with the wholesaler. In his opinion, an actively engaged manager is essential for the team relationship to excel.

What do you look for in a candidate?

When seeking a wholesaler who really stands out, Adams looks for individuals who have several years of experience and proven success working for top names in the industry. It is wise to search for people with existing connections to financial advisors and a variety of firms. Most important, Adams says, is an individual who is keenly interested in working independently.

To ensure both parties hold up their end of the bargain, be certain the contract includes a clear explanation of distribution activities and expectations of both the wholesaler and the manager. Include clauses that will help deal with unexpected situations, such as individuals leaving either party. Also, establish the ground rules for conferences and marketing, such as agreeing to who will provide what. Oberholtzer recommends stipulating exact standards of service, even menial details like how much time is acceptable on a phone call.

How do you get paid? 

Determining how the wholesaling firm or individual will be paid is paramount to satisfaction on both sides. Tracking and paying only on fund flows from specific channels or firms visited by the wholesaler would be ideal. Because it is costly to track the origin of fund flows, using one of three more typical structures makes life easier on both parties. Oberholtzer explains that one common option is to pay an upfront amount that is a fixed percentage of the management fee of the fund, often in the in the range of 30-50 bps. As Adams points out, the expectations are agreed upon in the contract, holding both parties accountable in the case of an upfront payment structure. Adams also mentions a second option, which is to pay your third party marketer a monthly retainer. He says having a monthly financial obligation may serve as incentive for managers to remain active in their deal with the marketer to get the most out of their arrangement. Also, compensation based on performance enables managers to hold their marketers to a high standard of performance. Another structure Oberholtzer suggests is to pay both an initial and an ongoing fee. Keep in mind there may also be additional fees to consider, and should be ironed out in the contract. These may include fees for conference attendance or displays or registering your fund on key platforms plus other incidentals. Adams reminds us that there are no set guidelines for creating a fee structure, no rulebooks to follow—as long as you are specific in your contract, you and your marketing team can craft an agreement that suits everyone.

All parties need to work in harmony and cover all the bases ahead of time. As Oberholtzer says, “Success at this is a dance, and everyone needs to be doing the same dance.”