Acquisition
signals Canadians’ preference for advice
This week,
a long-rumoured acquisition in the mutual fund industry materialized. National
Bank of Canada purchased (http://www2.cdn-news.com/scripts/ccn-release.pl?/current/0611039N.html)
no-load direct fund marketer Altamira Investor Services. While this deal was no
surprise to most industry observers, it’s a sober reminder of the preference
that Canadian investors have for professional advice.
There is a
saying in the domestic mutual fund industry – “mutual funds are sold, not
bought”. Since most Canadian financial advisors are compensated via commissions
resulting from selling products, the saying implies that Canadians prefer to
get advice on what to buy rather than going it alone. I would agree with this
statement since even many of those that are making their own decisions are only
doing so because they can’t find an advisor with whom they feel completely
comfortable.
Q: What are the three most important things in
real estate?
A: Location, location, location.
Distribution
is to financial services what location is to real estate – it’s absolutely
critical. Just like Ford Motor Co. has many dealerships that sell its vehicles,
financial services firms have channels through which its products and/or
services are sold. Canada’s largest banks have their own exclusive distribution
channel – bank branches.
The
Canadian fund industry, however, has relied on what is called the
“broker/dealer” network. Brokers are stock brokerage firms, the largest of
which are owned by banks. Dealers include firms like my employer, Sterling Mutuals
Inc., and other firms that deal only in mutual funds, not stocks and bonds.
Altamira
was perhaps the most successful of direct sellers in the Canadian fund
industry. When the industry was still in its infancy, with room to grow by
leaps and bounds, it was easier to succeed. Now that the industry’s growth has
matured and that so many firms have been established to compete against each
other, direct sellers face a huge hurdle.
A company
that relies solely on advertising and good performance to attract investors’
attention, and money, is fighting a losing battle against firms that are ready
to pay financial advisors a commission every time they invest client money with
the firm.
It’s a
simple issue of economics.
One need
only look back a few years to see that the direct selling no load mutual fund
company is facing extinction. Remember Bissett Investment Management – the
Calgary-based money manager who once sold only true no load funds? Franklin
Templeton purchased them back in 1998.
Many
die-hard do-it-yourself investors remember fondly the year 1995 – when Scudder
launched a no load family in Canada. It planned to take Canada by storm by
offering a solid lineup of mutual funds with low fees. It was so determined, it
picked up all of the fees for all of its funds for a full year – then
subsidized them heavily for years thereafter. That is, until they were
purchased by Maxxum funds; now part of the Mackenzie family of funds. Scudder’s
history is documented in more detail in this older article (http://www.sterlingmutuals.com/Telus_Scudder_26jan2001.HTM).
This all
translates into a shrinking universe of true no load funds, which are most attractive
to thrifty do-it-yourself investors. It’s quite clear that fund companies
simply can’t survive in this environment without a strong distribution channel.
Selling direct is a much tougher game than it used to be in Canada.
Interestingly,
this is in sharp contrast to the more mature and much bigger U.S. market –
where investors love to jump into the driver’s seat of their retirement
savings.
Expect this
trend to continue. I’m not just talking about the trend of companies gobbling
up each other (which is standard in a mature industry that has become more
competitive). More importantly, I’m speaking of firms striking one of various
alliances – be it a merger, joint venture, or strategic alliance – to take
advantage of each other’s distribution.
What
National Bank has done, with its purchase of Altamira, is open up a large and
completely new distribution network (its branches) that was previously
unavailable to Altamira.
If you’re a
devout do-it-yourselfer, don’t worry. You still have many quality no load fund
companies from which to choose. ABC Funds, GBC, Mawer, McLean Budden, Perigee,
PH&N, Saxon, and Sceptre are great independent firms who remain happy to
sell you their funds without any sales charges.
Dan Hallett, B.Comm., CFP, CFA is the Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, Alberta, and Manitoba.