In the fall 2007, the director of Stralem and Company, a mutual fund provider with $3 billion in assets under management, decided to outsource many of the firm's technical needs to Ultimus Fund Solutions.

The result: the mutual fund provider has been able to focus more on its core business (on operations and distribution specifically) for the same or less cost than it was doing in-house before the partnership with Ultimus.

"We wanted to build up our institutional client base. And we were doing all of that in-house. That's when we understood we're not on the right platforms, and we looked for a fund servicer to outsource some of what we were doing in-house," says Andrea Lustig, director of Stralem and Company. "Ultimus took over hours and hours of work in terms of administrative, transfer agent and budgetary work. And along with doing it all for the same or less cost than we were doing it in-house for, they're bringing new and better ideas to us."

The drive for boutique fund providers to outsource in order to streamline operations is largely motivated by the largest providers that make it difficult, if not impossible, for many new players to enter the industry and succeed over the long run. Since 2011, the top three fund providers - Vanguard, BlackRock's iShares and Fidelity - have been slowly increasing their percentage of the fund provider industry, rising from 32% to more than 34%. And yet, smaller providers have flourished in numbers. There currently are 658 small fund families (with total AUM of less than $5 billion) out of 811 total fund families. In 2011 there were 554 small fund families of the same size out of a total of 679 total fund families, according to Morningstar data.

"The biggest providers still dominate the mutual fund and ETF fund provider industry, but there are boutique providers no one heard of years ago and the ones that are succeeding are those that are smart in how they differentiate their strategy and in how they handle their operations and distribution," says Bob Dorsey, co-founder and managing director of Ultimus Fund Solutions, a fund administrator with 34 clients that sponsor 79 open end and closed end mutual funds. Part of the reason boutique providers with unique products are succeeding is because advisors are seeking them, Dorsey adds, naming Dimensional Fund Advisors, Forward Funds and Berwyn Mutual Funds as mutual fund providers that have operated and distributed successfully by focusing on uniquely specialized products.

Research from Cerulli Associates found that while only 15% of advisors concentrate on a unique clientele with more specific product needs, their practices accounted for 29% of overall advisor assets as of the end of June 2013.


Indeed, the opportunity for providers is apparent - according to the Investment Company Institute, mutual fund assets worldwide reached an all-time high at the end of 2013, due primarily to strong capital appreciation in equity. In fact, asset managers' profits surged to $93 billion last year, only 7% below their historic pre-crisis peak, according to the Boston Consulting Group.

With data showing financial advisors wanting more unique products amid a growing market, how can smaller providers gain a foothold?

Dorsey says that in an environment that's more and more concentrated -making it harder to distinguish from the rest of the pack - it's imperative for smaller providers to outsource aspects or their business that distract from their operations to maintain a competitive advantage.


In their quest for success, new mutual fund and ETF providers may want to consider offloading certain functions so they can spend their time more efficiently, says Lustig. "Many smaller fund companies, don't have resources to do everything in-house," she says. "They may be better served by outsourcing administration, fund accounting and transfer agent functions so that they can concentrate on other functions such as marketing and distribution."

For mutual fund and ETF providers, when is outsourcing really worth it from an operational, marketing and technology perspective? Here are some questions that providers, servicers and consultants say are essential to determine if it's worth it:

1. Do you need access to technology? "Access to technology enables you to participate on platforms and can be essential to growth," states Lustig. "If you are not on Fundserv, for example, you can't get on platforms you need to be on to operate and distribute."

2. Do you need more advice on the platforms you're already on? Outside administrators often have the resources and expertise to set up selling agreements and can often help boutique firms evaluate how much is reasonable to pay to get onto certain platforms.

3. Do you need more distribution advice? "Fund administrators won't necessarily help fund providers with marketing," says Lustig, "but once you have selling agreements in place, they can guide you in your selling and distribution efforts."

4. Do you need help reducing regulatory risk? Fund administrators help alert providers ahead of time to regulatory changes but providers should keep in mind that the fund company is ultimately responsible, many providers say. Fund administrators also aid in preparing regulatory filings and compliance.

5. Do you need more support with securities pricing and with overall compliance? An important issue being reviewed by the SEC is how providers are valuing securities, Lustig says. How you determine the value and calculate net asset value is a big issue. "Fund companies can outsource valuing securities in fund portfolios to the administrator, reducing the firm's time required for this," she notes. "Overall, while the fund provider is ultimately responsible for all functions, outsourcing transfer agent and administrative functions enables us to benefit from their expertise and resources," she adds.

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