Advisors periodically have to instruct clients to dispose of an unprofitable or troublesome investment. They now face similarly pragmatic decisions on one of their own largest investments — their mutual fund business.
Some advisors have recently taken a look at their own “big-picture” and decided to exit the fund business, at least in part because of the low investment yield.
“We couldn’t make any money at it,” says one advisor who decided to drop his MFDA license due to the downturn. He was charging neither deferred sales fees nor front-end load, which left him with just the trailers . After sharing even those with his fund dealer, he was netting 50 basis points — $5,000 per million in assets under administration. “That doesn’t go very far toward salaries and overhead,” he says, adding the erosion in fund values exacerbated the low returns.
His frustration was compounded by poor communication from fund managers, which he believed led him to have very scant information for worried clients. “You want to talk to the managers who are getting paid all this money and have all the credentials. What are they doing?”
The frustration increased during sales calls from fund representatives who didn’t own the funds they pitched him. “How the hell do you expect me to get excited about the product if you’re not (in it)?” he asks.
Other reasons included the compliance requirements of the Mutual Fund Dealers Association, commonly cited by professionals approached by Advisor.ca.
Finally, he offered his clients the choice of moving into segregated funds or moving to another fund-licensed advisor.
None of the advisors consulted by Advisor.ca regrets dropping the fund registration. “I’ve been happy ever since. I have absolutely no regrets about the path I’ve taken,” says Richard Segal, CFP, president of Toronto-based Baywood Financial Corp., who moved from the former Investment Dealers Association of Canada platform to the MFDA platform and then sold his fund business.
In Ontario, an advisor pulling his or her firm out of the fund business can make what is known as an Application For Surrender to the Ontario Securities Commission, or simply not submit the required December 1 renewal for the following year.
Ahead of that date, those considering the move may face some soul-searching as they consider the cultural differences between the two sides of dual-licensed status.
“I haven’t really seen anybody who’s actually managed to handle both areas with equal degrees of liking (it),” Segal says. Differences in mindset, between the responsibilities, include follow-up strategies. In an insurance sale, the broker does not have to follow-up every two or three months, he believes, “whereas if you’re an investment advisor who has a good client, and haven’t called the client for a three-month period, you’ve got a problem.”
The transaction cycle also differs tremendously between the two sets of responsibilities and, with it, the cash flow. An insurance sale takes longer, involves issues such as client insurability, and may include a requirement for an attending physician’s statement and risk of decline. “By the time you’re finished, you’re looking at quite a time lag from the time you sign an application until the time that you get paid,” he says. Meanwhile, fund transactions — and therefore advisor compensation — happen shortly after the client writes the cheque.
Further, freeing oneself of the compliance burden allows increased focus on risk management, suggests Nathan Disenhouse, president of Toronto-based Natel Management and Financial Services Ltd., who sold his fund business last year. “I had been thinking about it for quite some time because I felt there’s a potential liability if you aren’t also talking to your clients about critical illness — living and death benefits,” he says.
Meanwhile, although the low revenues may not change in the short run, differences in compliance between the two areas need close examination, according to Stephen G. Kelman, investment counsel, analyst and co-author of the Investment Funds Institute of Canada/Peel Institute of Applied Finance Life License Qualification Program.
Kelman argues the duty of care, outlined in the Financial Services Commission of Ontario’s Code of Ethics and the codes of insurers, can be as exacting as the KYC requirements of the MFDA. “The standards and ethical conduct are very comparable,” he says.
For advisors moving clients to segregated funds, the duty of care implicitly requires a clear judgment as to whether the client’s situation justifies the added cost, he stresses.
Moreover, the investment component of a universal life insurance policy can also be an underperforming and unsuitable investment.
Taken together, these factors leave some advisors with some serious thinking about one of their most important investments before December 1.
Al Emid is a Toronto-based financial journalist, covering insurance, investing and banking.
(05/01/09)