Suspicions raised as E-Trade’s F-class program stalls

(April 21, 2004) Discount broker E-trade has been forced to shelve plans to sell F-class funds directly to investors after two fund companies decided not to participate. Some insiders believe industry pressure halted the program.

E-Trade announced its new FundPlus program on March 30, promising investors access to low-fee F-class funds (usually sold exclusively through the advisor channel) for a flat charge of $26.99. Elliott & Page and AIM Trimark were cited as the first two participating fund companies in E-Trade’s press release.

But AIM Trimark pulled out within days, stating that the FundPlus program was not consistent with the firm’s beliefs and its intent for F-class funds. “We believe clients are best served by expert, professional and knowledgeable advice from qualified financial advisors,” the firm said in response to queries from investors. Elliott & Page followed suit last week.

“Advisor-sold fund firms are worried about alienating their most important distributors,” noted Rudy Luukko, investment funds editor at Morningstar Canada in a column posted yesterday. “So they have effectively created a common front, continuing to make F-series funds available only to investors who are clients of fee-based full-service advisors.”

Fund industry analyst Dan Hallett suspects that distributors — specifically brokers and dealers that sell load funds — put pressure on Elliott & Page and AIM Trimark to pull out of E-Trade’s program. “There’s no proof of this but the suspicion comes from the industry’s once-strong dislike for successful direct sellers like Altamira,” Hallett wrote in his weekly online column.

Hallett says there’s no question that advice has value and that clients of good advisors are happy to pay for that advice. But he adds that making F-class fund available to those who neither want nor need advice makes good sense.

“If pressure from advisors was at least partially to blame for Elliott & Page’s and AIM Trimark’s withdrawal from E-Trade’s initiative, it’s likely that those advisors aren’t truly confident in the value of their advice — a sad statement for any professional,” Hallett states.

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Steve Koury, an advisor with Inter-Equity Asset Management in Mississauga, Ontario, says he’d disappointed that E-Trade can’t offer the FundPlus program, and views the development as a setback for the industry.

“Investors are already leery about the practices of the mutual fund industry,” he says, adding that allowing the public to access low-fee funds through a discount brokerage “can only be good for reputable advisors and will help flush out those advisors who hide fees or do not disclose the total costs.”

The fall of FundPlus generated some angry responses from do-it-yourself investors in the Wealthy Boomer discussion forum. “The F-class revolution has been crushed for now by the lazy and unethical alliance of mutual fund companies, distributors and advisors,” one participant wrote.

Meanwhile, E-Trade says FundPlus isn’t dead, just on hold.

“We are still committed to the program,” chief operating officer Bruce Seago told Morningstar, adding the firm has been talking to other fund firms. “It’s a new concept for the fund companies and they see a bit of a conflict with their advice-based channels.”

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What do you think? Did advisor pressure help derail FundPlus? Should F-class funds be available directly to investors? Share your thoughts in the Talvest Town Hall on Advisor.ca.

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

(04/20/04)

Doug Watt