Dealers struggle with deluge of new notes

The proliferation of principal-protected notes coming to market is posing a challenge for the country’s mutual fund dealers. Advisors are asking for them, but firms are forced to go through a stringent due diligence process before they can add the notes to an already-crowded product shelf.

Peter Loach, managing director of mutual fund research at BMO Nesbitt Burns, estimates his team reviews 6-10 notes every two weeks. “The sector is mature, if not saturated,” he said at a panel discussion at the Changing Channel: The Future of Mutual Fund Dealers conference on Friday in Collingwood, Ont.

John Armstrong, vice-president of Armstrong & Quaile, says his firm took all alternative products off the shelf after the Portus and Norshield sagas. But he said the Ottawa-based company now does offer selected notes and hedge funds, if they can secure errors and omissions coverage. That requires a level of due diligence that is “almost unbearable,” Armstrong said, since all products have to go through a review committee.

“It’s an internal process,” Armstrong explained. “We can’t afford to bring in a third party because of the amount of work involved, and if we don’t get the information we are looking for, we just move on.”

Part of the problem is the limited amount of information available on some notes. Hedge funds present a similar problem. “We are pushing for prospectus level disclosure,” said Loach. “With a mutual fund, we can rely on the fund companies [for information]. The heavy lifting is in notes and hedge funds.”

“These products are more sophisticated and you’ll never be able to fully explain them to clients,” added Ronald Kosonic, a partner with Borden Ladner Gervais LLP, who also took part in the panel discussion. The discussion was moderated by mutual fund analyst Dan Hallett.

At Armstrong & Quaile, the company compels advisors to attend presentations so they can understand how alternative products work, and why some notes don’t make it through the approval process. But Armstrong says that some of that “bottom-up” pressure from advisors to offer notes and hedge funds to clients has dissipated in the wake of Portus.

Still, alternative products aren’t going away and attendees at the conference are looking at cost-effective ways to include them among their other, more conventional offerings. For instance, the Federation of Mutual Fund Dealers, a co-sponsor of the ADVISOR Group conference, is working on a product due diligence checklist.

It was also suggested that dealer firms could team up and hire a third party to evaluate alternative products. “It makes sense to join forces,” said one audience member. “If you want to compete with the banks, you have to think bigger and collectively.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com