PH&N gets into advisor space with new low-fee funds

One of Canada’s oldest investment firms is getting friendlier with advisors. Vancouver-based Phillips, Hager & North Investment Management Ltd. is offering new low-MER funds that investors can buy through their advisors.

“We spent two years analyzing the market and working with advisors,” says John Montalbano, PH&N’s president, from his downtown Toronto office. “Those advisors were telling us that they would love more access to lower-fee products.”

On July 2, the company will launch a B-series and F-series version of their funds, with MERs that are well below the industry standard and the minimum investment reduced from $25,000 to $5,000. The B-series of the bond fund, for example, will have an MER of 0.84%, compared to the category average of 1.72%. The balanced fund is set at 1.38% compared to 2.67%, while the dividend income fund will have an MER of 1.64%, compared to a category average of 2.32%. “There’s a very substantial discount to industry averages,” says Montalbano.

PH&N have been working with advisors — about 6,000 of them — for years but until now, advisors weren’t getting paid by the company. To make their funds more accessible to the average investor, the firm attached trailer fees to these new offerings. Like their MERs, the trailer fees are about half the industry standard, ranging from 10 to 50 bps depending on the fund.

“Many advisors are thrilled that we’re adding trailers and providing choice for them,” says Montalbano. “For the first time in a long time they feel like they can provide a low-cost fund family of product to their clients and still get paid.”

By no means are PH&N the first company to offer low fees and trailers, in fact, Dan Hallett of Dan Hallett & Associates says the company is the last to give trailers to advisors. “PH&N was the lone holdout among the lower fee no-load companies in terms of paying trailer fees,” he says. “The (other companies) to varying degrees have all paid trailer fees for years, but PH&N have never paid a dime.” Hallett says adding trailer fees further opens the broker-dealer network to them and gives the company “a wider potential client base than they’ve got currently.”

But while PH&N want new clients, Montalbano takes a more altruistic view of their low MERs. He says Canadian fees are simply through the roof. “Fees are absolutely too high right now in relation where current yields are for bonds,” he says. “A bond fund yielding somewhere between 4% and 5%, and with the average MER at 1.72%, half is being eaten by fees and that’s before the effects of inflation.”

With such low fees and increased accessibility to investors, how will the rest of the fund industry react? Montalbano doesn’t care. “We pay no attention to what the industry will say,” he says, but then adds, “We’re hoping if anything, this kicks off a wave of lowering fees in the industry. If that’s the case, then everyone’s won.”

The fact PH&N is offering low-MER products might not have an effect on the rest of the industry itself; it’s the consumers who will dictate MER percentages in the future. Montalbano says it’s new, young and wired investors who are turning to low-fee products. “Clients today are far more informed than they’ve ever been. The result is we have more clients than ever before seeking us out because of our lower fees.”

The lower buy-in price may also make PH&N’s offerings more attractive. Montalbano says they reduced the minimum investment by $20,000 so advisors could use their funds across their entire client base. “At $5,000 you can have a significantly lower client size and still apply this consistently across all the client’s portfolios,” he says. Reducing the initial contribution doesn’t affect PH&N because “there’s very little service involved,” says Montalbano, as the services are being done by the advisor. If a client wants to buy directly from PH&N, they still need to come up with $25,000.

For some clients $25,000 is chump change, so PH&N are also introducing a low fee hedge fund, and according to Hallett, possibly a first for a low fee, no-load fund company.

To get on board an investor has to go to the company directly, with $1 million in investable assets. The MER will be around 1.60%. “The fees on the hedge fund side are awfully high,” says Hallett. “You have these two and twenty structures that gives the manager quite a healthy base fee in addition to performance fee when they do well. I don’t know that (these lower fees) will have an impact on the industry, but they’ll certainly get some interest there.”

Montalbano says the company’s taking “all the good stuff” from this “relatively exclusive” product and doing away with exorbitant fees. “Our fee structure is flat. Any upside goes directly to our clients,” he says.

The hedge fund is a multi-strategy fund, with a layer of fixed income and high-yielding securities. “It’s got a layer of traditional hedge fund strategies,” says Montalbano, “and then it’s got another layer of opportunistic distressed securities and portfolio insurance.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com