Advisors explain why they’re opting out of mutual funds

(September 28, 2004) Although the mutual fund industry staunchly defends the fund-only registration category, there is evidence that some advisors, particularly insurance specialists, are letting their mutual fund licences lapse.

During its fiscal year ending last March, the Ontario Securities Commission (OSC) issued 5,498 new mutual fund registrations but counted 7,517 discontinued registrations, some due to government-ordered terminations, but most resulting from voluntary lapses.

The time and energy necessary to cope with the complexities of two very different products (insurance and funds) can lead to the necessity of dropping one of them, explains Susan St. Amand, president of Sirius Financial Services in Ottawa and one of the statistics in the OSC’s tally.

“My specialty wasn’t (funds). My specialty was more in the insurance and planning end. I found that if you were going to be doing funds that you pretty much had to be doing it all the time,” she says. “There’s a lot to study and keep on top of to know where the managers are and what they are doing.”

The compliance burden figures in the decisions of some advisors, including St. Amand. Regulations require that each time 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 has equal prominence with the advisor’s name. Fund industry consolidation has meant that some advisors have endured this process several times recently, she noted.

Stock market volatility, disappointing returns, declining asset values, and client resistance to funds are also fuelling the licensing lapse, it seems.

During the mutual fund heyday, “it was certainly easy for anybody who wanted to enter the industry,” suggested another advisor. “Most of them at that time were really just looking at the mutual funds course which is not a very hard course.”

Increased competition from banks and other outlets has also increased the pressure on fund advisors, he said. “All the arrows are going in the wrong direction.”

After letting their fund licence lapse, advisors take as many different routes as they have reasons for the decision. Some advisors sell their mutual fund books of business, electing to keep their insurance business intact. That decision involves a series of steps, such as looking for a vendor take-back arrangement or financing through fund dealers such as Aegon Dealer Services.

Focusing solely on insurance presents a good news-bad news equation, explained Bruce Bullock, a Cheltenham, Ont.-based advisor. Insurance-only advisors who put their clients into segregated funds may leave themselves open to accusations of lowering their own costs while raising the clients’ costs.

Commissions are generally higher for segregated funds than for mutual funds, he points out. By comparison, the deferred charge schedule is less advantageous to clients with a segregated fund than with a mutual fund since the decrease to zero usually takes a longer period of time. So clients might end up paying more for wealth products when buying segregated funds than when buying the underlying mutual fund, he pointed out, despite the advantages that come with seg funds, such as maturity guarantees and death benefits.

The fee-for-service approach appeals to other advisors. A B.C. advisor who allowed both licences to lapse decided that the fee-only approach had professional, financial and personal advantages. On the professional side, clients have an increased perception of an advisor’s professionalism and freedom to work with different advisors. Financial considerations include not having to pay licensing costs.

As with other choices, this one also has drawbacks, including lower income than dual-licensed advisors and a belief 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 workable solution for Rick Thorpe, president of Toronto-based Thorpe Benefits. Several years ago, Thorpe decided that mutual funds meant too much paperwork. “I was getting more and more disenchanted with it because of the detail involved,” he said. “I was probably saying to myself ‘What the hell am I doing in this business?'” he said, laughing.

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Thorpe struck a deal to turn over clients needing funds to a fund-licensed advisor in return for a continuing split commission arrangement. (In fact, Thorpe let the mutual fund side of his practice lapse but not his license. He keeps his fund license active but does not deal in funds.)

Thorpe’s other reason was simply a greater comfort level with insurance than with mutual funds. “I’ve been in the life business and benefits business through my career,” he said.

Art Melo is a Toronto-based financial writer.

(09/28/04)