the watch of time

Now that I’m back from a prolonged, on-line, technically generated hiatus…

The March issue of The Investment & Insurance Journal includes the results of a research project looking at how compensation could impact advisor behaviour, in relation to mutual fund sales and redemptions.

The source study was conducted last fall, on behalf of IFIC (The Investment Funds Institute of Canada). Behaviours focused on were how investors and their advisors choose specific funds, as well as the influencers on fund assets, arched by the role of compensation.

Determining that no single factor explains flows affecting a given fund at a given time, Investor Economics, conductor of the study, came up with three major influences: “macroeconomic and demographic factors, individual fund returns, and preferred access to distribution”. The first set of these may overpower all other factors – enhancing the appeal, and thus preference, of certain funds or asset classes. However, investment returns “are the single most valuable predictor of sales and redemptions at the individual fund level”. Notwithstanding the flow of monies to funds which benefit from “preferred access to distribution through a captive or affiliated sales force”, it is the first two categories which “form the basis of the relationship between advisors and clients”.  If those two influences are in place, the advantage of the affiliated distribution arm does come into play.

Advisors at full service brokerages still heavily favour mutual funds: according to industry regulator IIROC, assets other than mutual funds represent only about 30% of the total. For those under the Mutual Funds Dealers Association (MFDA), the non mutual fund ratio is less than 10%.

Insofar as compensation, advisors and clients are more focused on investment returns. Advisors with smaller books of business rely more on deferred sales charge (DSC) remuneration. However, there is an overall shift occurring to ‘unbundled fee-based advice’. In full service environments, there is a much higher percentage of assets in fee-based programs than with mutual fund and insurance-licensed advisors.

The study does suggest that offering ETFs (Exchange Traded Funds) could ‘arguably provide additional incentive’ to mutual fund dealers shifting to the fee-based model.   Important catalysts for such advisors will be the product shelf plus “how the cost of advice is applied”.

Research looking into the influence of fund fees on behalf of the Canadian Securities Commission believe this study is flawed, taking exception to the posit that simple correlations establish causality. They do not indicate conclusive evidence “about the relationship between variables because they do not control for other things being equal”. For example, funds do not exhibit the same characteristics, nor does the study “account for risk adjusted performance”. The conclusion is that, without sufficiently detailed data, one cannot establish “the relationship between mutual fund performance and mutual fund flows or about other pertinent factors that may affect those flows”.

When I was in the mutual funds distribution business, there was a raft of anecdotal as well as practical, objective experience illustrating the importance of establishing trust with clients, based on regular contacts and actions demonstrating putting their interests first – whatever the macroeconomic or fund performance measures lingering. Longevity in such relationships contributed mightily to an advisor generating sufficient compensation to remain in the business, as a positive contributor.

The value of advisors being able to provide personalized advice, backed by planning resources and software as applicable, whatever the compensation model, should not be underestimated.