Financial Advisors

Mutual Funds: Ascertaining the Total Cost of Ownership

By Nick Darsch and Adam Kornegay, both SVP, Business Development for Ultimus Fund Solutions

Mutual fund sponsors and board members have a fiduciary responsibility to their shareholders to oversee and monitor, amongst other things, the fund’s annual operating expenses, including management fees, distribution fees and “other expenses” such as fund administration costs.

As the fund sponsor or a board member, you may wish to know if your fund’s operating costs are on par with funds of similar complexity and size. You may also want insight into why a fund requires more resources than budgeted or how services performed by your administrator and your law and audit firms are intertwined. Further, you may want to better understand regulatory changes that have resulted in providers adding line items to your bill, including fees to support NPORT, NCEN, intermediary oversight, escheatment, etc.

As a fund sponsor, if your fund is at scale but you’re still waiving advisory fees because of substantial expenses, you may want to seek advice on possible course corrections. Importantly, you want to learn how the fund can be more profitable by reducing operating expenses.

The answers to these questions require measuring, benchmarking and assessing the mutual fund’s Total Cost of Ownership.

What is the Meaning of “Total Cost of Ownership” for a Mutual Fund?

The Total Cost of Ownership for a mutual fund is the amount it costs to create and run the mutual fund complex. While many fund sponsors look at the traditional fund administration fee or the per account transfer agent fee, the evaluation of what services are being delivered within those fee structures is critical to managing your overall fund expenses.

Determining total cost is not simply a matter of adding up the bills from various service providers. For example, your administrator’s service model impacts other provider costs such as out-of-pocket billings, printing, insurance, custody and other professional fees (e.g., legal, audit). And this can have a tremendous impact on your overall fund expenses. In addition, the indirect costs of employees performing operational tasks on behalf of the fund and the related opportunity costs of forgone value-added activities are also important.

The Total Cost of Ownership of a mutual fund complex is calculated as follows:

Total Cost of Ownership = Direct Costs + Indirect Costs + Opportunity Costs

Determining the Total Cost of Ownership for Your Mutual Fund

To determine the total cost, first consider the list of services needed to operate a mutual fund complex. These services generally fall into the following categories:

  • Fund Administration
  • Fund Accounting
  • Transfer Agent
  • Shareholder Servicing
  • Legal and Audit Services
  • Printing
  • Chief Compliance Officer
  • Trustee and Officer Expenses
  • State Blue Sky and SEC Registration
  • Insurance
  • SEC and Other Regulatory Filings
  • Other Administrative Services

Next, ascertain the entity that performs each service along with the relevant expense.

Direct costs to third-party providers, such as custodians, fund administrators, attorneys and accountants, are straight-forward to quantify. But it is also important to uncover out-of-pocket costs and surcharges that directly impact the fund, yet are hidden below the line as pass-through expenses from many administrators.

Tasks performed by the adviser’s staff present indirect costs, as well as opportunity costs to the adviser and fund, that may not show up on a statement of operations, but have a large impact on an adviser’s ability to profitably manage a fund complex. These costs, discussed in more detail below, are difficult to quantify but important none-the-less because they increase the overall cost of operating the fund.

Ask the Right Questions to Right-Size the Total Cost of Ownership

1. Direct costs: Are you overpaying for services received?

Review the fund’s direct costs to identify unused contracted services, redundant services and hidden fees.

Review your servicing contracts.

By reviewing the contract, you’ll determine all of the services your administrator could be providing for the fee you are paying.

  • Do other administrators provide services that may eliminate or greatly reduce the cost of certain other service providers?
    • For example, have you reviewed your administration agreement to determine if regulatory filings are included in your service contract? You may find the fund is incurring legal fees unnecessarily because your provider does not offer legal administration services.
  • Are your audit costs high because of the poor quality of your administrator’s financial reporting services?
  • Are services being performed by the adviser’s staff that should be performed by the administrator?
  • Are contracted fund administration services being left unused?
  • Is your transfer agent charging for numerous transaction-based activities such as new account set up, web transactions, etc.?
  • Is the service contract transparent regarding out-of-pocket and pass-through fees?

Identify pass-through expenses and mark ups included in administrator and other third-party fees.

Providers of administration services incur costs themselves, including for systems, connectivity and data.  Are these costs passed through as part of the administration fees and, if so, do you know if the costs are marked up? For example, does the fund administrator pass through and mark up fees for anti-money laundering compliance? If so, the mark up is an example of a hidden cost of ownership.

Look for “surprise” charges in the billing statements.

One-off fees often lead to unexpected charges. Examples include extra fees for automated transactions, shareholder calls, ad-hoc reporting and special projects. These direct, out-of-pocket expenses represent examples of unanticipated – and unbudgeted – costs of ownership.

2. Indirect costs and opportunity costs: Have you identified and quantified?

Indirect costs and opportunity costs are pernicious because they are difficult to identify and quantify.

Assess the cost of adviser staff performing administration-related functions.

Administration functions performed by an adviser’s in-house staff may not be designated as a fund operating expense, thereby underrepresenting the fund’s true cost. This occurs commonly with respect to legal administration, including board support and governance.

For example, employees of the adviser may participate in the fund valuation committee. Or employees may take on officer roles and responsibilities such as secretary or treasurer. Not only are these expenses not assigned to the fund, but the staff performing administration-related tasks are forgoing other work, thereby incurring opportunity cost.

If your fund administrator performed these functions as part of its core offering, you would have the opportunity to enhance your fund’s growth prospects by redirecting your team to value-added activities, such as distribution, marketing and client service.

3. The role of the fund administrator: Collaborator or service provider?

Your fund administrator should be your partner.

Recognize whether your administrator identifies efficiencies and cost savings.

Is your fund administrator coming to you with options to add efficiency and save expenses? For example, has your administrator discussed the potential cost benefits of a series trust versus a standalone trust? Has your administrator partnered with you to implement efficiencies such as shareholder self-servicing tools or to assist with new product development opportunities?

Benchmark fund fees against similar funds.

Fund prospectuses can be used to benchmark fund operating expenses versus peers. Administrators, such as Ultimus, see a broad range of funds and can assist with this benchmarking process.  Ultimus can help you evaluate the fund budget and identify opportunities to improve the Total Cost of Ownership.


With fee pressures and regulatory change forcing fund sponsors to thoroughly evaluate their overall operating model, the cost of operating a mutual fund complex is not as straight-forward as doing an administrator-to-administrator fee comparison. Rather, there are three components to the Total Cost of Ownership: 1) direct costs, 2) indirect costs and 3) opportunity costs. Reach out to Ultimus to learn if your fund’s Total Cost of Ownership is right-sized. We can help you better understand all costs associated with operating a fund and we are here to partner with you as your fund administrator of choice.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Ultimus Fund Solutions (Ultimus) is a trusted business partner to asset managers, delivering customized Fund Administration solutions. The company is leading provider of full-service fund administration, accounting, and investor solutions to support the launching and servicing of registered funds, private funds, and public plans. Ultimus also offers customized structures designed for the unique needs of pensions, endowments, foundations, and other large institutions.

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