Technology key to facing massive change

New trends in compliance and technology are forcing massive change in the dealer channel. But the lure of higher revenues and better profitability can give dealers the incentive to work with these trends, by using new tools to help deliver the package and still keep ahead of the regulatory and compliance curve.

Panelists discussing new revenue opportunities and specialized support solutions at the ADVISOR Group’s Future of Mutual Fund Dealers conference in Collingwood, Ont., say new structures and processes are being put in place at dealer firms to face the new compliance requirements. This makes compliance an integral part of an advisor’s day-to-day work, as opposed to simply relying on compliance departments that operate like a separate, administrative arm of the business.

The industry is developing new tools to help advisors build deeper relationships with their clients, facilitating the transition from a transaction-oriented service to wealth management. More firms are getting involved in product manufacturing as part of that process, and more firms are relying on technology to help deliver the package and still keep ahead of the regulatory and compliance curve.

David Erickson, president of Capstream Inc., says technology is allowing firms to create products, tools and systems well beyond their past capabilities. The offerings are more cost effective and easy to operate, and it’s easier to find service providers with expertise in the area.

“It’s a good environment for transition,” he says. “There’s a good opportunity to look at what’s been done, follow those initiatives and do it yourself.”

The industry has shifted to become more dealer-centric, said Gary Brent, CEO of HighView Financial Group, with competition becoming more sophisticated and clients more discerning. But while a broader array of product would improve revenues, the same products are still being offered by every firm.

“You need to become a bit of a manufacturer. Advisors need more from you than compliance,” he told the group. “They need a framework.”

That framework is manifesting itself in form-managed accounts, white-labelled products and pooled accounts.

“We’re not suggesting MFDA dealers become stock or bond pickers by any means though,” says HighView president Mark Barnicutt. Instead, the firm is developing products with its own label and using the revenue they generate to support its advisor channel.

In “reverse engineering” the products, the company took apart a mutual fund’s costs line by line and found that the biggest costs were associated with management and manufacturing.

“You do not need to pay 1% for a Canadian equity mandate,” Barnicutt says, because an institutional manager can deliver the same for 45-50 basis points. “We took some of that revenue and put in a very rigorous manager search and due diligence process. And it’s applicable to the retail market. Shift the costs and components that make up revenues.”

Such products require a significant pool of capital to get off the ground, however.

“One hundred million dollars is preferable but you could do it with $50 million with a view that you’ll get it to $100 million in a year or two,” Barnicutt says. Following that, the underlying costs of running a managed account or pooled asset program are tiered down, with additional assets helping to make the MERs increasingly competitive.

Fellow panelists warn that selecting managers is tougher than picking companies, particularly since “the talent goes up and down the elevators,” but they also offered a number of other ways firms could use the money to cope with and compete in the current business environment.

Providing tools is important, but adequate training and finding ways to get advisors to use investment policy statements and developing better note-taking habits also occupy a prominent place on the list.

The results of effective training can significantly improve long-term profitability. Client notes facilitate customer service, but also mitigate lawsuit risks; deeper KYC practices can lead to advisors managing more of a client’s portfolio; and investment policy statements, used properly, tie the whole wealth management process together.

The caveat, says Barnicutt, is that “you can first launch these things, but it is a lot of work to train people how to use them. You need to go into the branches and teach them how to use these, how to talk to clients; otherwise it will become just another template. Once you get these in place you have a portfolio approach to managing client wealth as opposed to just a transaction approach.”

Filed by Kate McCaffery, Advisor.ca, Kate.McCaffery@advisor.rogers.com

(09/22/06)

Kate McCaffery