BMO advisors get first crack at draw-down product

BMO Mutual Funds is the latest entrant into the fast-growing retirement-income market with a product that will attempt to cover the current demands of the industry: automatic portfolio rebalancing, a tax-efficient retirement income and principal protection.

But unlike independent manufacturers, BMO plans to use the product to boost its own distribution network and will offer its LifeStage Retirement Income Portfolios only through its in-house advisors — at least for the foreseeable future.

“[It’s available only] at the Bank of Montreal because we have an immediate need within our branch channel, but we are looking at other distribution channels,” says Mark Stewart, senior manager of product development and management at BMO Mutual Funds. “We would like to bring our business to as many people as we can.”

An offshoot of the life-cycle funds the bank launched last year, the structure is similar to the Income Replacement Portfolios launched in January by Fidelity Investments. Both provide income from an investment portfolio that is rebalanced to correspond to a selected time horizon. Unlike the Fidelity product, BMO’s offering guarantees the principal.

The bank says it is well-positioned to compete with those existing options. Offering principal protection allows the bank to differentiate the product from most mutual fund products that offer retirement income, which do not guarantee the principal.

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Unlike guaranteed minimum withdrawal products offered by insurance companies, there is no reset option on the mutual fund alternatives. This can significantly diminish its investment growth potential. With many GMWBs investors can opt to lock in gains, which will reset the principal amount guaranteed. This can be a powerful compounding tool during market highs to offset market swings.

The BMO product only guarantees the initial principal the investment growth is at the mercy of the market without the benefit of resets during periods of strong performance.

The maximum management fee of 2.25% makes the program competitive with the more expensive GMWBs, the fees of which can be well in excess of 3%, Stewart says.

The BMO offering is priced similarly to Fidelity’s Income Replacement Portfolios, which carry MERs of up to 230 basis points on the B Series.

BMO’s LifeStage portfolios are currently available for three time horizons, maturing in 15, 20 or 25 years. The 15-year portfolio is a “current pay” option, which immediately pays a 6% annualized distribution that is indexed to inflation and guaranteed until the principal is repaid. On the 20-year and 25-year options, payments commence in the sixth and eleventh years, respectively.

Stewart says until the equivalent of the principal is exhausted, the distributions are tax-free and the investor has the option to withdraw more if there are gains, which will be taxed as capital gains. Income or capital gains derived from rebalancing the underlying portfolios are not subject to taxation.

“When it comes to funding their retirement, boomers and retirees ultimately need the following things: capital preservation, growth potential for their investments, inflation protection, tax minimization and dependable cash flow. Unfortunately, there aren’t many options available to achieve all of these goals,” said Stewart.

The portfolios will invest in notes providing exposure to the growth potential of the BMO Dividend Fund, BMO U.S. Equity Fund, BMO International Equity Fund, BMO Bond Fund and BMO T-Bill Fund. The fixed income funds are new additions, but the same equity funds underpin the BMO LifeStage Plus Portfolios.

These portfolios were had the misfortune of being launched near the beginning of the current market downturn and have struggled to impress.

For example, according to Advisor.ca’s FundWrapFilter the LifeStage Plus 2030 Portfolio has had a -3.7% return in the first six months after its inception in June of 2007.

The minimum investment for the LifeStage Retirement Income Portfolios is $5,000. The portfolios will invest in notes providing exposure to the growth potential of the BMO Dividend Fund, BMO U.S. Equity Fund, BMO International Equity Fund, BMO Bond Fund and BMO T-Bill Fund.

The minimum investment for the LifeStage Retirement Income Portfolios is $5,000. Upon certain anniversaries, the portfolio will rebalance toward a more conservative asset allocation with a heavier weight in fixed income to reflect the changing investment needs of the aging investor.

Filed by Mark Noble, Advisor.ca, Mark.Noble@advisor.rogers.com

(02/08/08)

Mark Noble