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Arman Salavitabar, CFA

Arman Salavitabar, CFA

Founding Partner, FundFront

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Comparing Traditional and Centralized Distribution Agreements for Alternative Investment Products

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Introduction

The distribution strategy for alternative investment products is crucial to their market success. This paper explores the differences between traditional distribution agreements and centralized distribution agreements, particularly when making a product bankable.

Traditional Distribution Agreements

Characteristics of Traditional Distribution Agreements

Traditional distribution agreements are bilateral contracts between an investment firm and each distributor. These agreements outline the terms and conditions under which the distributor will sell the investment product. Key characteristics include:

  • Customization: Each agreement is tailored to the specific distributor, considering their unique capabilities and market reach.
  • Complexity: Managing multiple agreements can be complex and time-consuming, especially for mid-level firms with limited resources.
  • Limited Reach: Traditional agreements often limit the distribution network to the firm’s existing relationships, restricting market penetration.

Process of Traditional Distribution

The process typically involves the following steps:

  1. Negotiation: Investment firms negotiate terms with each distributor, covering aspects such as pricing, marketing, and compliance.
  2. Agreement Execution: Once terms are agreed upon, formal contracts are signed.
  3. Implementation: Distributors begin marketing and selling the product, adhering to the agreed-upon terms.
  4. Ongoing Management: Firms must continuously manage and monitor each distributor relationship to ensure compliance and performance.

Challenges of Traditional Distribution Agreements

  • Resource Intensive: Negotiating and managing multiple agreements requires significant time and resources.
  • Inconsistency: Different distributors may have varying levels of commitment and effectiveness, leading to inconsistent market presence.
  • Scalability Issues: Expanding distribution networks through traditional agreements can be slow and cumbersome.

Centralized Distribution Agreements

Characteristics of Centralized Distribution Agreements

Centralized distribution agreements involve a single, unified contract that governs the distribution of an investment product across multiple channels. These agreements are facilitated by service providers or consulting partners who help standardize the product and make it bankable, opening it up to international distribution channels via banks, brokerages, and custodians. Key characteristics include:

  • Standardization: A single set of terms and conditions applies to all distributors, simplifying management.
  • Efficiency: Streamlined processes reduce the administrative burden on investment firms.
  • Broader Reach: Centralized agreements can tap into extensive networks, significantly expanding market penetration.

Process of Centralized Distribution

The process for centralized distribution is more streamlined:

  1. Service Provider Selection: Investment firms choose a service provider or consulting partner that will help standardize their product and make it bankable.
  2. Agreement Setup: A single agreement is established, covering all distribution channels.
  3. Opening Up Channels: The service provider makes the product bankable, facilitating access to international distribution channels via banks, brokerages, and custodians.
  4. Centralized Management: Firms manage their distribution efforts through a centralized system, which provides tools for monitoring and reporting.

Advantages of Centralized Distribution Agreements

  • Resource Efficiency: Reduced need for multiple negotiations and ongoing management of individual agreements.
  • Consistency: Uniform terms and conditions ensure a consistent approach across all distribution channels.
  • Scalability: Centralized agreements enable rapid expansion into new markets and channels.

Making Products Bankable

Understanding Bankability

Making an investment product bankable involves the standardization of key documents and processes such that it can be offered, transacted, and settled through banks and financial institutions. Bankable products are typically standardized, regulated, and easily accessible to a wide range of investors.

Case Study: FundFront’s HUBS Platform

FundFront’s HUBS platform exemplifies the advantages of centralized distribution for bankable products. By offering a database of bankable alternative investment products, HUBS simplifies the distribution process for wealth advisors, private banks, and other distributors. The platform’s key benefits include:

  • Operational Efficiency: Reduces administrative burdens through automation and standardization.
  • Expanded Offerings: Enhances investment accessibility by integrating with existing advisory systems.
  • Greater Access and Convenience: Provides clients with a seamless experience, increasing satisfaction and retention.
  • Curated Selection: Allows firms to select specific funds and managers they want added to HUBS, with FundFront making them bankable and integrating them. This enables firms to curate their own menu of products.

Conclusion

The distribution strategy for alternative investment products can significantly impact their market success. While traditional distribution agreements offer customization, they often fall short in terms of efficiency and scalability. Centralized distribution agreements, facilitated by making products bankable, provide a streamlined, consistent approach that aligns well with the needs of financial institutions and investors. As the industry continues to evolve, leveraging platforms like FundFront’s HUBS can offer significant advantages, enabling firms to expand their reach and enhance operational efficiency.

Investment firms facing challenges in distribution and looking to make their products bankable can benefit from exploring centralized solutions. For tailored assistance, firms can contact FundFront for bespoke solutions that address their unique needs.

Written by:

Arman Salavitabar

Arman Salavitabar

Founding Partner, FundFront

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