DundeeWealth sells Quebec dealerships

DundeeWealth is extricating itself from the MFDA and insurance advisor channels in Quebec. The company announced Monday it is selling the Quebec arm of its mutual fund and insurance advisor dealerships — which includes about 410 advisors — to Investia Financial Services, a dealership subsidiary of Industrial Alliance (IA).

DundeeWealth’s president and CEO, David Goodman, says the sale to Industrial Alliance is a step toward strengthening Dundee’s relationship with the Quebec distribution powerhouse.

“We are pleased to be forging a valuable relationship with Industrial Alliance, who will have a stronger distribution channel in the province,” he says. “DundeeWealth is delighted to have achieved a stronger and broader relationship with IA and its large group of mutual fund financial advisors.”

For IA, the cadre of new advisors makes it now the fifth largest mutual fund dealership in Canada. The company has the experience and footprint in Quebec to deploy those advisors more efficiently.

“The transaction is a logical fit for us,” stated Normand Pépin, executive vice-president of Industrial Alliance. “This opportunity allows us to further increase the size, scale and efficiencies of our Quebec mutual fund distribution operations. We welcome the opportunity to work with this network of highly qualified and experienced independent financial advisors, many of whom are already well known to Industrial Alliance.”

With the sale, DundeeWealth will no longer have any advisors in Quebec affiliated with the MFDA. It will, however, maintain its securities-focused advisors registered with the Investment Industry Regulatory Organization of Canada (IIROC). The deal with Investia includes 340 MFDA-only licensed advisors and 70 insurance-only licensed advisors.

While DundeeWealth’s stock price has been under pressure of late, it doesn’t appear this acquisition — the price of which has not been disclosed — has anything to do with raising capital. Instead, it appears DundeeWealth is exiting a portion of the Canadian market in which it has struggled and selling off a group of advisors who did little to enhance the company’s core business strategy.

For mutual fund manufacturers, owning an advisor dealership is usually a fairly low-margin business, with its value coming in creating an allied distribution network for the company’s products. In the case of DundeeWealth, this would be the highly regarded line of Dynamic Mutual Funds. A cursory look at the assets under management represented by the 340 Quebec-based MFDA advisors suggests they were successful at neither generating profits nor creating impressive distribution scale.

Industry analyst Dan Hallett, president of Dan Hallett and Associates, points out that if you divide the $2.6 billion of assets under management by the 340 MFDA advisors, you end up with a fairly paltry average book of business for each advisor.

“It seems their Quebec contingent were [not that successful], at least based on the implied assets under administration, which average around $7 or $8 million per advisor. As an average, that is really small because the average book of business in Canada is something like $15 million. I think that’s got to be a key reason for the sale,” Hallett says. “It’s quite below the average for the industry and quite a bit below average for Dundee’s other advisors in the country.”

Independent industry analyst Peter Loach says it is difficult to maintain low-margin MFDA business in particular, especially in a market in which the advisors are not performing. He believes the sale is a good fit for both DundeeWealth, which can offload the low-margin businesses, and IA, which has a large footprint and longer history in Quebec to integrate the new advisors.

Loach notes while it is important for mutual fund manufacturers to maintain allied distribution networks, it does not make sense to do so at the expense of profits.

“Industrial Alliance is building a very strong, growing franchise in the province of Quebec. This deal makes sense on both sides. It’s very tough to run an MFDA dealer because you pay out all sorts of high proceeds of the commissions to the planners themselves. Sometimes you’re paying 80%-plus in terms of the payouts that planners get,” he says. “If you take a look at the planning business in Quebec — and you’re not going to crack it in the first place — it’s probably better to sell, especially if they are losing more money than they are gaining through additional distribution of Dynamic mutual fund products.”

Jacques Carrière, vice-president of investor relations for IA, says the Dundee advisors are going to be rolled into Investia immediately, pending regulatory approval of the sale, which is expected to close on December 31, 2008. He believes the advisors will be happy with their new dealer, as Investia recently merged with AEGON Dealer Services, bringing on-board an updated and superior back-office platform.

“This gives scale to Investia. We bought AEGON Financial Services earlier this year. We’re going to be able to provide better services for these advisors, a better back office and compliance,” he says. “We will see about the product line, but we’ll be listening to their needs and trying to respond to them as quickly as we can.”

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

(11/03/08)