IDA firms seen profiting from fund sales slump

(November 4, 2004) The IDA has crunched the numbers on an extensive shareowner study conducted for the TSX earlier this year. The results reveal that although IDA member firms have benefited from a decline in mutual fund sales, there are still competitive challenges for the brokerage industry.

The TSX study found that although mutual fund holdings have been on a gradual drop, direct stock ownership has been moving up, with 57% of shareowners reporting that they held stocks in 2004, compared to 51% in 2000.

Poor performance, new products and an abundance of negative media headlines have made many investors shy away from mutual funds, the IDA reports in the latest edition of Wealth Watch.

“Money otherwise destined for mutual funds has found its way into income trusts, exchange-traded funds, structured notes and wrap programs,” the IDA says. “As the primary distributor of these products, investment dealers stand to benefit at the expense of mutual fund-only distributors.”

However, the TSX study also found that shareowners are more likely to hold stocks through a bank or trust company, rather than an investment dealer. Only 42% of shareowners interviewed in 2004 said they hold stocks or stock-based funds at a brokerage firm, down from 59% in 2002.

The IDA attributes that decline to mutual fund investors moving their assets away from brokers and towards more traditional financial institutions, such as the big banks. “It is the mass-market investor that is believed to be shifting out of their brokerage firm, while more sophisticated investors who have adopted a solution-based wealth management approach continue to rely on the utility brokerage accounts and their advisors provide.”

Still, the IDA concedes that banks and insurance companies have maintained their prominence among shareowners through strong cross-selling of various products and services.

Of the 2,500 Canadians surveyed by the TSX, about 800 said they had a brokerage account. Of those, 77% said they used a full-service firm. “Surprisingly, only 45% of these shareowners reported dealing with a bank-owned brokerage firm, compared to 50% who reported dealing with an independent brokerage firm.”

“This indicates that independent and regional firms are proving to be formidable competitors and are doing a good job at attracting client and assets,” the IDA concludes.

The study also indicates that while shareowners identify growth as their primary investment objective, preservation of capital rose in prominence between 2000 and 2004. The IDA says in the past, investors seeking capital preservation purchased traditional products such as GICs.

But recently, there’s been a trend towards structured products, such as principal-protected notes and equity-linked term deposits. “Firms who want to cater to these investors need to ensure their shelves include such products.”

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