(September 28, 2004) Although the mutual fund industry vigorously defends the fund-only registration category, there is evidence that some advisors, especially insurance professionals, allow mutual fund licenses to lapse.
In the fiscal year ending last March, the Ontario Securities Commission (OSC) registered 5,498 new mutual funds but counted 7,517 registrations that were discontinued, some due to government-mandated terminations but most due to voluntary terminations.
The time and energy required to deal with the complexity of two very different products (insurance and funds) may lead to having to abandon one of them, explains Susan St. Amand, president of Sirius Financial Services in Ottawa and one of the statistics in the OSC result.
“My specialty was not (funds). My specialty was more insurance and planning. “I’ve found that if you’re going to raise funds, you basically have to do it all the time,” she says. “There is a lot to study and track to know where managers are and what they are doing.”
The burden of compliance is factored into the decisions of some advisors, including St. Amanda. The regulations require that whenever an advisor’s dealer changes, the advisor must notify clients and have new office signs, stationery and business cards printed, ensuring that the dealer’s name is as prominent as the advisor’s name. She noted that consolidation in the fund industry means some advisers have gone through this process several times recently.
Stock market volatility, disappointing returns, falling asset values ​​and customer resistance to funds also appear to be contributing to license lapses.
In the heyday of mutual funds, “it certainly was easy for anyone who wanted to get into this industry,” another advisor suggested. “Most of them at that time were just looking at the mutual fund rate, which wasn’t very difficult.”
Increased competition from banks and other establishments has also increased pressure on fund advisers, he said. “All the arrows are pointing in the wrong direction.”
Once a fund’s license expires, advisors take as many different routes as they have reasons to make the decision. Some advisors are selling their mutual fund accounts, opting to keep their insurance business intact. This decision involves a number of steps, such as seeking dealer collection options or financing through fund dealers such as Aegon Dealer Services.
Focusing solely on insurance equals good news and bad news, explained Bruce Bullock, an advisor based in Cheltenham, Ont. Insurance advisors who place their clients in segregated funds may expose themselves to accusations of reducing their own costs while increasing clients’ costs.
He points out that commissions are generally higher for segregated funds than for mutual funds. In comparison, the deferred fee schedule is less favorable for clients with a segregated fund than a mutual fund because it typically takes a longer period of time to reduce the amount to zero. So customers may end up paying more for wealth products by purchasing segregated funds than by purchasing the underlying mutual fund, he noted, despite the benefits of segmented funds such as maturity guarantees and death benefits.
The fee-for-service approach appeals to other advisors. The BC advisor who allowed both licenses to expire decided that a fee-only approach had professional, financial and personal benefits. On the professional side, clients have a greater sense of the advisor’s professionalism and the freedom to work with different advisors. Financial considerations include not having to incur licensing costs.
Like other options, this one also has drawbacks, including lower income compared to dual-licensed advisors and the perception that fee-for-service advisors receive lower levels of support from fund companies.
Building a strategic alliance with a fund-licensed advisor became the most feasible solution for Rick Thorpe, president of Toronto-based Thorpe Benefits. A few years ago, Thorpe decided that mutual funds meant too much paperwork. “I became more and more disappointed with this game because of the details in it,” he said. “I was probably like, ‘What the hell am I doing in this business?'” he said with a laugh.
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Thorpe entered into an agreement to refer clients in need of funds to an advisor licensed for the fund in exchange for a continued split commission arrangement. (In fact, Thorpe has allowed his mutual fund practice to expire, but has not allowed his license to expire. He maintains an active fund license but does not trade the funds.)
Thorpe’s other reason was simply a greater comfort level with insurance than with mutual funds. “I have been in the life insurance and benefits business my entire career,” he said.
Art Melo is a financial writer based in Toronto.
(28/09/04)
