As a new twist on the recent securitizations of 12b-1 mutual fund fees, BISYS Fund Service last week announced plans to launch a series of wrap fee-backed deals to hit the private market as early as first quarter of next year.
Though unable to give a deal-size estimate at this phase of development, Jim McCoy, senior vice president in product development at BISYS, said the program is sparking considerable interest from BISYS' clients, which include brokerage firms, investment advisors and mutual fund companies.
"I'm taking incoming calls [from investors] about the program, two to three a day right now," said McCoy. "Though how much they're going to raise in assets, and how much are they going to front so we can securitize, I just don't know. It's just so completely new."
To get an idea of the segment's potential, past 12b-1 mutual fund securitizations have ranged between $50 million and $200 million.
A wrap account is a personalized portfolio of funds geared toward an investor's individual needs. "You come to me," said McCoy. "And I spend a lot of time interviewing you, and I determine what your investment time frame is, and your investment objective is, and your risk tolerance."
Typically, a portfolio consists of six to eight funds and is then continually managed and updated in line with "Modern Portfolio Theory," a Nobel prize-winning strategy of investment, said McCoy.
Minimum investments in wrap accounts can range from $5,000 to $1 million, according to McCoy. However, on the norm, minimums usually start around $100,000.
Wraps, the Better Deal
Securitization could be very good news for wrap programs, according to McCoy. Typically, he explained, brokers steer clients away from wrap accounts because there's no commission associated with the sale.
"So brokers sell individual mutual funds and annuities instead of selling wrap," said McCoy, "even though wrap in many, if not most circumstances, is probably a better investment for the investor."
However, by securitizing annual wrap fees, which are typically between 1.25% to 1.5% of a total investment, BISYS is able help wrap accounts compete with mutual funds.
"We have just figured out a way to pay the broker up front, so the brokerage firm gets revenue when they open one of these accounts, whereas they didn't before," said McCoy. "And in return we take the annual wrap fee, for a period of time, typically three years."