What Is a Third-Party Distributor?

A third-party distributor is an institution that sells or distributes mutual funds to investors for fund management companies. These entities generally have no direct relation to the fund itself. Partnerships between mutual fund companies and third-party distributors often come with various fees and provisions.

Since they are independent of fund management companies, third parties are, theoretically, unbiased when they sell products to investors.

Key Takeaways

  • A third-party distributor is an institution that sells or distributes mutual funds to investors for fund management companies.
  • Any mutual fund sold by a third-party distributor typically comes with more fees and provisions.
  • Because they may not be affiliated with fund companies, third-party distributors generally provide investors with unbiased advice.
  • Some companies may set up their own distribution networks such as Eaton Vance and Vanguard.
  • 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.

Understanding a Third-Party Distributor

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.

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.

The Role of a Third-Party Distributor

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.

Examples of Third-Party Distributors

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.