Campaign targets fee transparency

Every advisor has a different approach to disclosing fees but it’s getting more difficult to avoid the conversation. Some product providers are now aggressively pitching the low-fee argument to market their products, the latest being Barclay’s iShares, which launched a marketing campaign Monday, calling for more transparency in Canada’s investment industry.

The Exchange Traded Fund provider is calling its campaign “Ask the Right Questions.” It plans to unfold in a series of bold ads targeting the investment community, raising issues with statements like “Canada has the highest management expense ratios (MER) in the developed world. Should your clients care?” or “Your clients’ funds aren’t doing as well as their benchmarks. How concerned are you?”

Barclay’s says the campaign is designed to speak out against what it calls systemic problems in Canada’s investment industry, questionable product design, hidden costs, tax inefficiencies and incomplete advice.

“This campaign is our opportunity to include our voice in a growing movement that demands better practices in our industry,” says Heather Pelant, head of iShares for Barclay’s Canada. “It is time to foster an environment of due diligence and evolve toward a more disciplined, rational and clearly thought out approach to investing — one that champions science over emotion, knowledge over ignorance and transparency over everything.”

The iShares campaign seems very similar to one launched in January by ING Direct’s direct-to-investor-sold Streetwise funds. The Streetwise funds are balanced portfolio funds that use index strategies within them and charge a 1% MER.

Paul McKenna, senior manager of marketing for mutual funds, says his company launched their campaign to directly target investors, to educate investors about MER and how a high MER can eat into long-term performance and on how most mutual funds don’t beat their industry benchmark.

“The average MER for a Canadian balanced fund in Canada is 2.6%, so a manager is going to have to beat the index by 2.6% just to keep up with the fees. In most cases managers can’t outperform by that much,” McKenna says. “There are low-cost options that are not getting the attention they deserve. We are going to put the words behind the low fee battle with our products and with our advertising.”

iShare’s campaign is presenting a similar message that touts the cost effectiveness of their ETFs — which Pelant estimates on average cost about 36 basis points. However, iShares is directly targeting advisors with this campaign, not the easiest demographic to sell to when they don’t offer a trailing commission for their product.

“There are no trailers. As a product, ETFs are a natural fit for fee-based advisors who by their nature are separating their advice from the implementation of it — which to me is transparent; it’s clear,” she says. “Having said that, we are having exactly the same conversation with transactional advisors. They will ask themselves a lot of the same questions. A lot of them say I am so proud of that fact I have advocated and built long-term positions and created wealth for their clients.”

Industry analyst Dan Hallett, president of Dan Hallett and Associates, says advisors shouldn’t look at ETFs and funds as an either/or proposition. Hallett, who constructs portfolios for advisors, says he uses both ETFs and higher MER mutual funds in the investment portfolios he constructs.

He believes iShares’ campaign is timely because when returns are down, as they have been of late, low-fee products become much more attractive for advisors. However, he’s not sure how much of the message will trickle down to the average Canadian investor.

“To the person who reads the business pages every day or who is a bit more engaged in the process in terms of running their portfolio they’ll certainly take notice of this type of campaign,” he says. “They are a relative minority amongst Canadian investors.”

A low-fee campaign is nothing new. He says it was tried more than ten years ago by a company called Scudder Funds.

“They were a big U.S. Mutual Fund sponsor and they had decades of experience behind them. They came in to Canada and launched from a clean slate a family of mutual funds in 1995, many of which mirrored successful funds they had run for years,” he says. “They spent a ton on advertising, billboards, newspaper ads — you name it. Their whole angle was to sell direct to investors and reach out to them through advertising and promotions and give them not only quality active management but really promote the advantage on fees.”

Hallett says they even absorbed the MER during the first year an investor held the fund, making it basically free to invest. Ultimately, the company couldn’t attract the business necessary to sustain itself and was later acquired and rolled into Mackenzie Investments.

“One of the take-aways from that experience is that distribution is a huge factor in the success of a mutual fund company,” he says. “If we look at advisor-focused firms like Synergy and Clarington, which were launched within a couple of years of Scudder’s entry into Canada, neither exists as a stand-alone company today but they were certainly were met with much more success. Synergy had about $1.5 billion when they were sold and Clarington had about $4 billion.”

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

(03/31/08)

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.