Saxon seeks closer ties with advisors

The balance between a public mutual-fund company’s commitment to investors in its funds and those who have bought into the company is a tenuous one. Saxon Financial has experienced this first-hand since going public in July 2005. Since then, its commitment to building its business towards the advisor channel has been as steadfast as its dedication to low fees — but will it last?

While the business it gets from the advisor channel are not the mainstay of Saxon, the company has launched several initiatives to change that. First it was with F-Class funds, followed by a dedicated advisor website; now it hopes a new note will boost its bottom line.

This September, Saxon will offer the Saxon Balanced Protected Deposit Note, which is backed by the Bank of Montreal. The new note will have an all-inclusive annual fee of 2.45%, with a selling commission of 4.25% plus a 0.25% per-year trailer fee. The MER on the Saxon Balanced Fund — the note’s underlying investment — is 1.86% by comparison.

“All of the notes I’ve seen out there have been 2.95% and above,” says Mary Savona, Saxon Funds Management’s vice-president of marketing and sales. “Relative to other principal-protected notes, we are competitively priced and 2.45% tends to be probably pretty close to a lot of MERs on straightforward balanced funds.” She also justifies the higher fee, as the note could see even better performance through leveraging.

Mark Chow, a senior analyst at Morningstar Canada, is surprised to learn Saxon is going to offer a principal-protected note, particularly on this fund. While investors are looking to protect against what they fear might be a downturn in the markets, Chow thinks this strategy is better for funds that are highly volatile than for balanced funds that don’t have a negative five-year period .

Since 1991, the underlying fund has only had two years with negative returns: 1994 and 1998, when the fund lost 3.2% and 1.3% respectively. Chow thinks that Rick Howson, who manages the fund, is a strong manager, particularly on the downside. Chow questions why investors would want extra protection on this fund more than on other offerings.

Many of the changes at Saxon target the fee-based and discretionary advisor channel. Saxon is learning first-hand just how tough a space this is to break in to. The decision to go after fee-based planners was made back before the company went public. The advisor channel also has the greatest potential.

“We are looking at some of those smaller firms to really partner with them, [because] they don’t have [the] crowded shelf space that the big guys do; they are looking at very selective firms to distribute their products through and they are also looking at firms that can maybe do something customized for them in a way,” Savona says of Saxon’s plan.

“A lot of advisors in the IDA firms have made inroads into fee-based because there has been a top-down strategic positioning of these firms to increase their fee-based business,” she says. “That’s where the considerable growth has been, as opposed to the MFDA channel, although they are starting to move that direction as well.”

Within the IDA channel, Savona says RBC has had the greatest success at generating more fee-based business than transaction-based business. Saxon identified RBC early on as having the greatest potential because their fee-based business is the biggest part of their planning division right now.

In the broader scheme of things, the new note makes sense as a way to help get the company expanded into the advisor channel, Chow advises. “Now that the company is public, I guess they are looking for more avenues to get more revenues,” he says.

Up until now, the advisor channel has been Saxon’s weakest point. Their managers are well respected and have been around for a long time, but they had no way to push their funds through the advisor channel, Chow explains. “That’s a big channel, that’s where a lot of assets are going to flow through if they want to grow their business.”

Aside from the note, the company continues to transform itself to become more advisor-friendly. One part of that has been its new website, which is restricted to advisors. Additional features, like the possibility of two-way communication and a French-language version of the site, are in the works, and could be online soon.

So far, most of the traffic has come from B.C. and Alberta, where the firm doesn’t have a sales-force presence. It’s a cost-effective way to reach out to advisors..

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(08/28/06)