Keil Fiduciary Strategies LLC has issued a white paper, "Economies of Scale: Implications of Analyses Depth of a Fund Board’s Assessment." This paper examines issues related to economies of scale that my be realized by fund sponsors, and is intended to "create a construct within which Boards may choose to examine this issue, and suggest topics that should be raised and seriously considered by fund Boards."
The paper suggests that fund boards ask key questions about economies of scale, including:
1) from what business segments does scale originate (and thus ‘operational savings’)?
2) what is the level of savings?
3) what is the appropriate sharing of savings via scale that should be passed along to fund shareholders?
4) how impactful (sic) is corporate structure and investment philosophies on the ability to realize scale?
5) how should savings be used with regard to reinvestment or parent company dividends (if applicable)? and
6) what should a Board expect from a fund sponsor in the way of data, information, analysis and the like that brings transparency to the economies of scale issue, i.e., more concrete evidence that scale creates savings and sharing with investors is indeed occurring?
The paper also provides some suggestions for actions boards can take to better assess and analyze economy of scale issues:
Trustees should consider forming a Board philosophy on economies of scale and craft related guidelines. While functions such as fund advisory services may generate not insignificant profits for fund management (economies), those margins may be partially or fully negated by expenditures on the sales, marketing, shareholder servicing, and information technology sides of the business Items such as waivers, expense reimbursements, expense caps, and reinvestments in a fund advisor’s business may be legitimately considered savings or revenues shared with shareholders and can be quantified.
The paper is an excellent source of guidance for fund directors, helping them assess and address economies of scale during their fund's annual 15(c) process.
The full text of "Economies of Scale: Implications of Analyses Depth of a Fund Board’s Assessment" is available at the following link.