MUTUAL FUNDS CANADA   

While MutualFund.ca, Yahoo and Google were growing in their Search Engine Marketing and Key Word empires they were becoming a real threat to the entire media and financial services industry by almost becoming mutual funds themselves. Meanwhile back in Canada the mutual fund industry was the fastest growing segment of the financial services sector since the 1990s and continues evolving to lead the financial services industry today. Assets have been increasing steadily from $25 billion in December 1990 to an outstanding amount of $704 billion AUM as at September 2007.

For almost every year since 1990, the majority of exponential asset growth has been due to new sales of this investment product that has become increasingly popular. The share of assets held in foreign funds has also increased substantially over the past 10 years. In 1990 foreign funds accounted for 17 per cent of total assets; by 2007 they made up fully 40 per cent of fund assets. In 2001 911 had a significant negative impact on North American Markets, which has since recovered only recently. Cancellation of the 30% Maximum Foreign Contribution Rules were also responsible for this growing trend of Canadian's wanting more diversification and also looking for better oveall returns.

There are 85 mutual fund management companies operating in Canada. The industry is moderately concentrated, with the top 10 companies accounting for 77 per cent of all assets. The industry also includes 140 dealer firms involved in the sale of mutual funds. In total, the industry employs about 100,000 mutual fund representatives, advisors and stockbrokers. The main types of mutual funds are money market funds, bond funds, equity funds, dividend funds, mortgage funds and real estate funds.

In 2007 there are currently 100 investment fund companies with their 1,842 funds in 2006 growing to 1,962 total independent mutual funds available in Canada representing over 50 million unit holder accounts. According to the CIFSC there are 10 Asset Classes and more than 50 fund categories not including bank funds, segregated funds, labour-sponsored funds, hedge funds, closed-end funds, pooled funds, trust funds, off-shore funds and exchange traded funds.

The industry can generally be divided into the manufacturers of funds and the distributors, although the banks, credit unions and caisses populaires are involved in both sides of the industry. The Advisor Channel is more highly coveted than at any other time in history, the industry often forgets that all financial products are sold, there is a refreshing trend by market participants to recognize and respect independent financial advisors for there ability attract and retain important long-term financial relationships. Advisors partner with more affluent clients that prefer overall financial advice rather than the standard, apparent and dismal approach of mass marketing by the big banks and large financial institutions.A Mutual Fund Company that is involved solely in the manufacture of mutual funds tend to distribute their funds through mutual fund representatives, investment advisors, financial planners, mutual fund dealers and life insurance agents, while the banks, credit unions and their Quebec counter part caisses populaires distribute their fund products through their retail branches as well as via independent advisors and brokers.

Mutual Fund Companies and distributors obtain revenue from three main categories of fees: management fees (to pay for the management of the fund), sales fees (to pay for buying and selling the fund units) and special fees (for specific administrative costs). The mutual fund industry is governed by provincial and territorial legislation regulating the underwriting, distribution and sale of securities. There is also extensive self-regulation by the Investment Dealers Association of Canada, the Mutual Fund Dealers Association of Canada and the stock exchanges.

 

Mutual Fund Definition

The main types of mutual funds are money market funds, bond funds, equity funds, dividend funds, mortgage funds and real estate funds. Within these broad categories are many smaller sub-categories. For example, there are many different types of equity funds that differ by level of risk as well as index funds, which track a particular market index (e.g. the TSX).

• Balanced funds consist of a combination of the main categories listed above and provide a means of further managing risk through fund diversification.
• Money market funds invest in short-term money market instruments such as Treasury bills, commercial paper and short-term government bonds. They represent low risk and high liquidity, but also earn a lower rate of return than other funds.
• Bond funds invest in government and corporate bonds with the objective of generating income and maintaining the safety of principal.
• Equity funds invest in common stocks issued by companies, primarily with a view to generating capital gains. Equity funds have a higher risk than money market or bond funds, but also provide the greatest potential for high returns. Equity funds are seen as good long-term investments such as, historically, common stocks have performed better than bonds and money market instruments over the long term.
• Dividend funds invest in preferred shares and common shares paying dividends in order to take advantage of the dividend tax credit as well as potential capital gains.
• Mortgage funds invest mainly in mortgages on residential units but may also include mortgages on commercial and industrial property, while real estate funds invest in income-producing real property. Mortgage funds offer income and safety while real estate funds offer long-term growth through capital appreciation.

Two innovations that are becoming increasingly popular are clone funds and wrap accounts. Clone funds are 100-per-cent RRSP-eligible funds that allow investors to mimic the return of actively managed foreign mutual funds. Wrap accounts are accounts where brokers manage groups of investments consisting of stocks, bonds, cash and mutual funds for a set annual fee, rather than receiving fees on a transaction basis.

Equity Funds made up 55 per cent of all mutual funds in December 2001, followed by balanced funds at 16 per cent and money market funds at 15 per cent. Within equity funds themselves, about half of the assets were invested in foreign common shares and half in Canadian common shares. over 64 per cent of all mutual funds are in some sort of international or offshore investment in December 2006.
 

Mutual Fund Company's solely involved in the manufacture of mutual funds tend to distribute their mutual funds through investment advisors, financial planners, mutual fund dealers and life insurance agents, although one company makes use of a dedicated sales force, while others sell their funds directly to the public through the mail, over the telephone and over the Internet. There are currently 150 dealer firms selling mutual funds, including discount brokers that conduct business over the Internet.

Canadian Trust Company, banks, credit unions and caisses populaires are also active in the mutual fund industry, selling their fund products through the retail branch and broker network. The banks have also recently begun selling third-party mutual funds through their retail branch network, generally focusing on the larger manufacturers’ products. The cost for these newly introduced bank offerings come at a greater cost to the banking customer; however for greater selection and often times better returns the alternative is better for the mass appeal of bank offered funds.

Since 2002 over 50 Mutual Fund Dealers have ceased to exist, in 2006 statistics showed up to 12 more dealers were in process of resigning from the MFDA while only 3 new dealers were applying. It is not certain whether these firms were foreign or domestic entities. The federal government and the mutual fund industry have both had the sentiment that there will be continued mergers, acquisitions and consolidation throughout the industry; which may not be in the best interest of the public, efficient markets or independent financial advisors.

Advisors Group Limited. one of the fastest growing mutual fund dealers in Canada is bridging the gap. Small Mutual Fund Dealers have had the idea to create a friendly merger to save on rising administration, compliance and technology costs. Groups like MutualFundDealer.ca have encouraged many industry participants to gather and discuss industry changes, effects and opportunities. Advisors Group Limited with close to 50 small dealers all on one back office look to reduce overall costs and refocuses on core business activities.

Independent financial advisors will look for better opportunities with niche players who have exactly what they need in inventory. Well-positioned products, services combined with competent management are a recipe for long-term financial success for 900 mutual fund representatives serving close to 120,000 Canadians. The concept of best level of technology combined with competent management is like a grass roots movement that has caught on fire. The highest advisor payout with many other innovative programs to reward, attract and retain the highly coveted independent advisor. Independent advisors, small mutual fund dealers and segregated fund dealers are encouraged to do an independent Dealer Cost Savings Analysis that will handily convince them that a friendly merger in these times of rising costs and administration can only benefit them and free up their time to focus on their customers. Freeing up close to $200,000.00 in locked in capital per dealer in order to achieve a more efficient and business like system, not to mention reducing administration and other rising compliance and technology costs makes sense for many financial services companies, dealers and independents to follow this important and meaningful service trend in Canada’s mutual fund industry.

There is a micro market of real dealers who have real customers and a Mutual Fund Exchange has been created for those who want to buy sell or exchange, as more and more investment people wish to retire others are prepared to take over, there is no doubt some large players are always willing takeover a Mutual Fund Dealer but not a small book of business. For opportunities to buy sell or exchange or retire a small book of business, a small book, practice or mutual fund dealer or even a small mutual fund company contact MutualFund.ca and post a private bulletin or money advertisement on MutualFundDealer.ca for an independent offer to buy or sell a book practice or dealer at a reasonable market price to fellow professional’s who have the same concept financial customer service.

 

Mutual Fund Representatives

Mutual fund companies, mutual fund dealers, and independent financial planning firms and businesses employ mutual fund advisors and mutual fund sales people throughout the financial services industry. Bank employees dealing with customer investment needs are licensed. Investment Dealers sell funds through IDA membership and often insurance agents may sell segregated funds and may also become licensed to sell mutual funds if licensed through a Mutual Fund Dealer.

As with Investment Advisors, Mutual Fund Sales Representatives are expected to build their own clientele and serve investors’ investment, retirement and estate planning needs. Unlike Investment Advisors, who are licensed to deal in stocks and bonds in addition to mutual funds, Mutual Fund Sales Representative s are only authorized to advise on and sell mutual funds and investment funds. Mutual Fund Representatives are not permitted to discuss or advise on stocks. Fund Representatives are not able to sell stocks either but may refer clients directly to a securities dealer. Mutual Fund Representatives or MFSR’s are essentially independent investment advisors working with or for a Mutual Fund Dealer. Mutual Fund Representatives are registered on the NRD National Registry Database and are provincially licensed to sell in each province that their Mutual Fund Dealer is registered.

                                                                    

                                                                          Mutual Fund Dealer

When it comes to compensation, keeping advisors happy is a no-brainer: just show them the money. But as the three firms that received top scores for total compensation in the 2006 Planners’ Report Card demonstrate, there is more than one formula for success.

The smart up and comer Advisors Group Limited is not actually a start up but the Pheonix of the Small Mutual Fund Dealers who have consolidated to create the best mutual fund representative, branch and dealer structure in the industry with numbers like 9.0 two years in a row it is no wonder what an 85-15 split with solid management and best level back office can do. For the second year running, PFSL Investments Canada Ltd. took first place in compensation, with a score of 9.4, placing ahead of FundEx Investments Inc. and Peak Investment Services Inc. But, even though all four share excellent scores, the similarities end there. At PFSL, each of the firm’s three streams — mutual funds, insurance and debt consolidation — have separate compensation arrangements. And, although average payout to the branches is 80% (a 5% increase went into effect at the beginning of the year), an advisor’s take depends on his or her rank.

“Some advisors override others and get a bit more of the payout,” says Jeff Dumanski, president and chief marketing officer at the Mississauga, Ont.-based firm. Generally, long-term employees who have recruited other advisors get the higher cut; these advisors tend to be responsible for additional costs, such as rent and office expenses, but the firm foots the Mutual Fund Dealers Association fees. PFSL also has a unique ownership program in place, under which reps who have been with the firm for a decade and who have reached a certain production level qualify to own their books of business, which they can then sell to other advisors when they want out. Even though its rating indicates most PFSL advisors are fans of the firm’s compensation plan, there are grumblings from some — probably those in the bottom ranks. “Compensation is the worst aspect of this firm,” says a PFSL advisor in Saskatchewan. Echoes a colleague in Ontario: “I’d like to see more compensation for people starting out.”

Markham based FundEx’s compensation grid is straightforward. “We get a 100% payout, which is an ideal situation,” says a FundEx advisor in Ontario. The majority of the firm’s advisors — who play a flat yearly fee — feel the same way, giving the firm a second-place score of 8.7 for compensation. But other factors make the 100% commission less than perfect for some advisors, as indicated by the 0.5-point drop in this year’s score over 2005. “The full payout was good at the beginning, but my costs have since increased by 40%,” says a FundEx advisor from the West. “The compensation works out to be average once you pay all the fees.” And some advisors are probably still smarting from an increase to the flat fee. “Our fee went up because of compliance measures, which was necessary,” says a FundEx advisor in Ontario. “But I know a lot of advisors were unhappy about it.”

At Peak, which took third place in this category, advisors’ payout depends on which of the three back-office systems they choose: RPM, Univeris or Winfund. Each requires a varying degree of work on the advisor’s behalf — the more work the advisor does, the greater the payout. “Some work is centralized and some is decentralized,” says Robert Frances, the Montreal-based firm’s president and CEO. “When the branches do more of the data entry and review work, compensation is greater. When Peak staff does some of the work, compensation is lower.” Frances estimates average payout across all three platforms is 82%, adding that the only additional costs advisors incur are MFDA fees. Peak also offers equity, but on a case-by-case basis. “It’s usually offered when we need to raise funds,” he says.

Frances describes Peak’s compensation as “the same as the industry,” and Peak advisors agree. “It’s competitive but not the highest, in relative terms,” says a Prairies advisor. Nevertheless, it seems to be working for the majority of its advisors, who gave the three-grid system a grade of 8.5.

The same can be said for Investors Group Inc. and Partners in Planning Financial Services Ltd. , which tied for fourth place with solid scores of 8.1 for compensation. “Our compensation is a blend of cash and near-cash items,” says Kevin Regan, executive vice president of financial services at Winnipeg-based Investors Group. Payouts at the firm range from 62%-82% for mutual funds to 50%-76% for trailers. “Near-cash” refers to credits advisors can earn toward marketing materials, benefits, education and stock in the parent company, IGM Financial Inc. Advisors pay MFDA fees, as well as for personalized marketing materials, printed client statements, a monthly software fee and other operating costs.

Mutual Fund Company Total Assets Under Management

 HYBRID AND ALTERNATIVE INVESTMENTS GAIN POPULARITY

 Assets and Revenue

Total assets held in mutual funds have increased exponentially in the last three decades from $3.6 billion in 1980 to $704 billion in 2007. Most of this growth has taken place over the past decade.

The share of assets held in foreign funds has also increased substantially over the past 10 years. In 1990 foreign funds accounted for 17 per cent of total assets; by 2001 they made up fully 34 per cent of fund assets. This growth reflects the fact that the Canadian government has increased the foreign content limits for RRSPs from 10 per cent in 1990 to 30 per cent in 2001. Then in the 2005 Federal Budget foreign contribution limits were abolished altogether.

Total asset growth can be further broken down into growth from new sales of mutual funds and growth in existing assets. For almost every year since 1990, the majority of growth in assets has been due to new sales.

Manufacturers and distributors of mutual funds generate revenue from three main categories of fees: management fees, sales fees and special fees. Management fees pay for the management and operation of funds and are deducted directly from them. These fees, which are usually expressed as a percentage of a fund’s net asset value, are known as the management expense ratio or MER. Published rates of return for mutual funds are calculated after the MER has been deducted. Customers pay sales fees directly to the Mutual Fund Company by way of the Management Expense Ratio, financial advisors and dealers who sell the funds on behalf of the mutual fund companies are compensated with a part of MER.

There are two types of sales fees: commissions, which are paid at the time of sale or shortly thereafter, and service fees, which are ongoing commissions to pay advisors and dealers for their ongoing services. Service fees are also deducted directly from mutual funds. Special fees apply to specific administrative costs (e.g. account set-up fee, transfer fee) and are paid directly by individual investors.

 The Mutual Fund Report

available exclusively to MONEY Magazine.