Mackenzie exec offers

(April 18, 2005) Fund companies serving the independent advisor need to take the lead role in confronting the challenges facing their distribution channel, according to a senior industry executive in the fund industry.

Speaking at Mackenzie University’s continuing education road show in Toronto last week, David Feather, president of Mackenzie Financial Services, delivered a “state of the industry” address, touching on marketing, the value of active management, controlling costs and load structures.

“About two weeks ago we came out with the low-load purchase option — we appreciate those of you who stayed on us to get this initiative done,” said David Feather. With little fanfare, Mackenzie has introduced this option on all of the company’s funds.

On a three-year schedule, the low-load option pays advisors 2.25% up front on both equity and fixed income funds. Equity funds pay a 50 basis point trail for the first three years, before being rolled upward to 1% in the fourth year and beyond. Fixed income funds offer no trailer in the first, but pay 25 basis points in years two and three before being increased to 50 basis points.

“For those of you who work in IDA houses, having your compensation front-loaded is important in the way it hits the grid. It means more take home for the advisor,” Feather told his audience.

With the trailer increasing over time, Feather expects advisors to encourage their clients to hold on to their investments for the long term. Such an arrangement benefits the fund manufacturer, which can expect lower redemptions; the advisor, who can earn higher trailers; and, Feather would argue, even the client.

“If you have a quality investment team, the longer the client holds an investment, the better the chance of a rewarding client experience. The investor often benchmarks their minimum hold period by this redemption schedule. As that time frame lengthens, the propensity for that fund is for its ranking to improve.”

Despite the rapid growth of the low-load market segment, he says the option poses no threat to the back-end loaded fund.

“The back-end load, strategically, is one that an experienced advisor could justify using if they are spending time with a small client. The advisor needs to be paid up front,” said Feather. “The back-end load is totally an appropriate plan to put the smaller client into, because you have to be compensated for your time.”

But back-end loaded funds still play an important role in an advisor’s practice, he says, especially if they are planning their succession. Back-end funds make it easier to attract a younger advisor to the practice, since they can serve as a safety net while the successor gets up to speed.

“We don’t think the adoption of low-load plans by the industry is necessarily negative on the long-term viability of the back-end load plan,” said Feather.

While he admits some of Mackenzie’s competitors offer higher up-front commissions, he hopes advisors will recognize the trade-off, in the form of higher MERs.

“We’ve been talking a lot about fees, we actually wrote a book about fees last year and sent it to all of you,” he told the audience. “We think it’s very important the industry be conscious of this and we are making this our real focus, looking at our operating expenses and understanding how we can get more competitive. You’ll hear more from us on that point in the year ahead.”

On the marketing front, Feather admits that the independent advice channel and the fund companies that cater to those advisors have fallen behind the bank branch channel as investors have sought out yield. The major banks have attracted $11 billion in the past year through their monthly income offerings.

Feather says part of the banks’ advantage has been the easy-to-identify and simply labelled offerings. To combat this, Mackenzie has renamed its MAXXUM Pension Fund as the MAXXUM Monthly Income Fund.

“We think it’s important to give advisors another competitive offering relative to what alternative distribution channels are having a lot of success with,” Feather said.

On the active versus passive management debate, he says there is no real argument, since the data speaks for itself.

“I know we beat this thing pretty hard for the past couple of years, but the numbers keep getting stronger for active management,” Feather said. “When you see people who get a lot of air time advocating passive management, you’ll see fewer and fewer citing numbers.”

Feather says 87% of Canadian equity funds have outperformed the benchmark TSX over five years. Over 10 and 15-year time frames, 49% and 55% topped the index.

Feather points out that do-it-yourself investors tend to see their costs run up by 1%. Factoring in those costs, he says the data is even stronger for active management, with 89%, 68% and 77% of Canadian equity funds topping the index over five, 10 and 15 year periods, respectively.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(04/18/05)

Steven Lamb