National advertising, a shift to more company stores from franchises, delivering services by an e-commerce site and using ETFs are on the table at The Mutual Fund Store

August 1, 2011 — 5:34 AM UTC by Brooke Southall


Brooke’s Note: If you’re like me, the name Warburg Pincus has a familiar ring – one of those boutique-like New York venture capital firms that does off-the-radar deals. But a lightbulb went off when Michael Martin, a Warburg exec, reminded me that his firm was also a mutual fund company with more than $10 billion of assets under management before selling to Credit Suisse in 1999. Then it started to make some sense why these same people were acquiring a decidedly one-off business called The Mutual Fund Store. See: Mutual Fund Store sells controlling interest to Warburg Pincus.

In the RIA world, The Mutual Fund Store is a biggie with $6.6 billion of assets under management and a far-flung presence spread across several states.

It has also grown fast from $1.2 billion of assets in 2006 when the first outside investor, Summit Partners, put some capital into it in exchange for a minority stake.


Yet the Overland Park, Kan.-based franchiser had reached a point where it might always remain an over-achieving RIA or an underachieving wannabe national company. See: What to make of Mark Hurley’s latest prophesy that most RIA firms will go out with a whimper.

With Warburg Pincus announcing Friday that it has taken a controlling interest in the company, The Mutual Fund Store now has a chance to be a fast-growing company by any measure – if its new mentor, Michael Martin, co-head of Warburg’s financial institutions group, can realize his vision.

Martin believes that The Mutual Fund Store gives Warburg Pincus a shot at going after the elusive market of everyday folks with $500,000 and less to invest – and making money at it without deceiving or soaking them.

“What we really like about The Mutual Fund Store is that they’ve found a way to [distribute] a product to the mass-affluent market in a transparent, cost-effective, scaleable way,” he says.

See: Why and how a lawyer in St. Louis is running RIA franchises in Fresno, Seattle.

Martin led UBS’s financial institutions team after departing Credit Suisse Group in 2002, soon after its merger with Donaldson Lufkin & Jenrette. Credit Suisse acquired Warburg Pincus Asset Management Inc. for $650 million in 1999.

National brand

Martin believes that Warburg Pincus, with its knowledge of the workings of big business and its impressive capital reserves, can transform The Mutual Fund Store into a genuine national brand. “I wouldn’t consider it a national brand right now,” he says.

Better yet, Martin says that The Mutual Fund Store should not be affected by regulatory changes coming down the pike. “They’re ahead of the game on that.”

An eye toward ETFs

Still, some industry observers consider mutual funds themselves to be opaque and expensive and see a growing shift to exchange traded funds. See: Windhaven’s success draws attention to emerging ETF managers.

Martin says that The Mutual Fund Store, its name notwithstanding, can evolve toward offering ETFs. He also notes that Bold’s firm steers clear of funds that charge 12b-1 fees and does not participate in revenue sharing.

“Over time they may change and some component of ETFs may be brought into the asset allocation; they’re not getting paid by the mutual fund so there’s no conflict,” Martin says.

Adam Bold, CEO of The Mutual Fund Store, is skeptical of ETFs. See his column: How ETFs have been oversold when it comes to flexibility, lower costs and tax efficiency.

Company stores

Warburg Pincus also believes it can add value to The Mutual Fund Store by moving it away from its nearly pure franchise model and pursuing a more aggressive policy of opening company stores, Martin adds. Warburg Pincus has investments in companies with retail stores and he believes that expertise can be brought to bear on its latest acquisition. Warburg Pincus, for example, has been an owner of Neiman Marcus since 2006.

“Rolling out company stores could bring a greater level of control and could result in higher profits as well,” says david Devoe, managing director, strategic business development group, Schwab Advisor Services. The Mutual Fund Store uses Schwab as its primary custodian.

One irony here is that Martin is proposing company stores just as Charles Schwab & Co. is going in the opposite direction. See: Schwab spells out the details of its franchise plan.

Additionally, Warburg intends to maximize Mutuual Fund Store’s use of the Internet through the introduction of an e-commerce site.

“There are interesting ways to distribute by the Internet and social networks,” Martin says. This effort can be aided by the team it maintains in San Francisco that is dedicated largely to investing in technology ventures.

Warburg Pincus has a total of $40 billion of investments including $15 billion of assets that are currently invested. Of that $15 billion, $3 billion is slated for financial services. The firm is a big investor in Primerica, which has 1,000 independent life insurance agents. Warburg Pincus also invests in small banks, including: Webster Bank of Waterbury, Conn.; National Penn Bancshares of Boyertown, Pa.; and Sterling Savings Bank, based in Washington.

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