How a mutual fund provider designs its fee platform can tell advisors a lot about how serious they are about serving the advice channel, says Tye Bousada, cofounder and co-CEO of upstart Edgepoint Wealth Management.
Before launching any product, Bousada traveled across Canada for nearly nine months meeting with successful advisors to get feedback on how a better mutual fund product could be developed for the Canadian investment space, and ensure it reflected the needs of established advisors.
Bousada says one trait universal to successful advisors is their commitment to lower costs for clients. Bousada says the advisors he met with were more than happy to forgo marketing frills if it meant lowering fees and delivering excess returns over time.
“We responded with lower management expense ratios right out of the gate. Where most mutual fund fees tend to be at 2% (200 basis points) or above that, we’re coming in substantially below, he says.
Bousada says that if advisors look at the cost of management on its pure equity funds, the global equity fund is 180 basis points, and the Canadian equity portfolio is 180 basis points and the balanced global and Canadian portfolios—growth and income portfolios—are 170 basis points.
“We won’t invest in golf tournaments, but we’ll deliver lower cost through our MERs, which overtime leads to better results,” he says.
Bousada adds advisors will pay for active management but want to see that correlation reflected in the fees. Hence a lower fee on their growth and income portfolios.
“We know it doesn’t cost as much money to manage the fixed-income portion of the portfolio—not to mention that when you’re charging a full-equity MER in a market where ten-year treasuries were sub -3%; that pretty much eats up the after-tax return of the fixed income portion. Really all you’re doing is charging a fatter equity MER on a portfolio at the end of the day.”
Established advisors don’t use deferred sales charges. Bousada says it costs more money for a fund to offer a DSC option. So investors who invest using another fee option, invariably end up losing some of their returns to subsidize the DSC program on a fund.
Edgepoint’s A-series class of funds only has a front-end load with a 1% trail. There’s no DSC offered through EdgePoint.
“The reality is the person who bought the front-end load fund has nothing to do with DSC, yet he or she is financing them. Why? It’s the way the mutual fund companies subsidize the cost of DSC,” Bousada says.
Established advisors might have used DSC in the past – to get where they are today – but now tend to use front-end load funds with a 1% trail or F-series or something similar.
Edgepoint’s final commitment to advisors is not to launch a fund mandate unless it makes sense for the clients they deal with. Performance, not asset gathering is the prime directive of the firm.
“A majority of the advisors we talked to have become mistrustful of the mutual fund industry. Some of them—not all—are led by marketing as opposed to investment [objectives]. They focus more on gathering assets as opposed to delivering returns,” he says. “Advisors said they are tired of financial supermarkets that launch a product when it’s hot just to gather assets. That fits in very closely with what we are—an investment-led organization. We will only launch a product when it makes sense for the investors. Our value proposition is to be attractive to a very small portion of the industry and then be a real partner with those advisors over time.”
Adds Bosuada: “We’re a trying to bring back that relationship of trust with advisors.”