Third-party funds struggling in branch channel

(April 8, 2005) Independent funds have become a fixture in the bank branch channel. But that doesn’t necessarily mean clients will end up there, says Cynthia Enns of Credo Consulting.

“Quite often there’s a bait and switch,” Enns explains. “They say, ‘Yes, we’ve got independent funds and all these choices, but how about this portfolio,’ where it’s 80% bank funds. It’s the same thing when you talk to an Investors Group advisor, they have access to [third-party funds] but they favour the in-house funds.”

In a recent report, Credo looked at the state of third-party funds in the branch channel, focusing on fund wrap programs. The study found that independent fund providers have limited access at the banks, despite their “open shelf” approach.

“When it comes to individual fund choices, the tellers are way more in tune with their own in-branch funds and that’s where they are putting clients as their first choice,” says Enns. “If someone comes in and asks for a third-party product, they are usually referred to the discount brokerage. If you want to be in a CI fund for instance, it’s available, but it’s not encouraged or supported.”

“The banks have figured out that their own management is the way to go in terms of financial rewards and controlling their assets,” she adds. “Even their third-party fund wrap programs, none of them are completely independent — they all have a mix of proprietary and third-party funds.”

Enns says she was surprised by the lack of optimism at fund firms about sales in the branch channel, which have been essentially flat for years.

“You have to be there, but don’t have high hopes — that’s what we’ve been hearing, especially from second-tier fund companies that are trying to make inroads into this channel.”

“It’s a place you need to be if you’re one of the top five fund companies, there is a place for you in those fund wrap programs. It’s tougher if you’re second tier. Even as a niche player, if you’ve got performance to back it up, you can make a role for yourself. But the banks are much more focused on brand.”

Third-party funds are often more of a marketing tool than a real strategic choice at the banks, she adds.

Part of the problem is a lack of support for such products. “If you’re an advisor and want to see your client portfolio and get all the details, it’s sometimes easier to have it in the in-house programs versus trying to support holdings in independent fund companies,” says Enns. “It can be a bit of a pain to deal with third-party funds, but Scotia has said they will be changing some of their back office processes to make it a bit easier to do that.”

And advisors in the branch channel are often less focused on individual fund sales, Enns notes, because they are dealing with other client needs, such as mortgages and daily banking.

In addition, although the banks are the main financial contact point for the majority of Canadians, their channel is the lowest rung on the retail ladder, the report says. “The money this client segment has available for investing is the lowest of any group in Canada.”

Still, some banks are using third-party funds, even if most are heavily skewed towards proprietary products.

“CIBC seems to be aware that third-party funds can drive sales at their Imperial Service level, the higher-end financial planner level,” says Enns. “They will use single fund choices in terms of building a portfolio quite regularly from third-party funds.”

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