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AIC move to double sales fees raises ire

Fund firm defends proposal, saying it consulted industry, KEITH DAMSELL writes

MUTUAL FUNDS REPORTER

There's a backlash brewing over AIC Ltd.'s move to sweeten the compensation it pays financial advisers.

As of today, the Burlington, Ont., fund company will automatically increase compensation on funds sold on a deferred-sales-charge (DSC) basis, taking away the financial incentive for advisers to move client's money after year seven. The measure will cost fund unit holders nothing and, in theory, will help stem redemptions at AIC. It's not an unusual strategy either -- a handful of firms, including AGF Management Ltd., Fidelity Investments Canada Ltd. and most recently, Mackenzie Financial Corp., have changed their compensation plans to keep advisers loyal.

It's AIC's move to double upfront sales commissions that has some advisers riled. Financial planners and brokers who sell the company's funds on a short-term, low-load schedule will get a 3-per-cent commission for their trouble, an increase from 1.5 per cent. After year three, low-load unitholders will be able to sell without a sales charge.

The temptation of higher fees is "a worrisome trend," said Chris Reynolds, president of Investment Planning Counsel Inc. of Mississauga. Joe Canavan, chairman and chief executive officer of Toronto's Assante Corp., said AIC's plan "goes against the grain" of an increasingly fee-based, performance-driven industry. And Kevin Cork, president of Calgary's Absolute Group was more blunt: "It pisses me off that any company would try to halt redemptions by playing to the supposedly lowest common denominator: the assumption that advisers will plop more money there simply to earn more upfront commission."

In an interview, Jonathan Wellum, AIC's chief investment officer, was somewhat taken aback by the harsh reaction of some advisers. The measures were taken following lengthy consultation with the industry, he said, especially commission-focused firms that are members of the Investment Dealers Association of Canada.

"We are not buying business," said Mr. Wellum, the long-serving lieutenant to AIC's billionaire founder Michael Lee-Chin. He dismissed suggestions that the commission schedule is a money-losing proposition, noting that rivals Dynamic Mutual Funds and Clarington Funds Inc. have a sweeter three-year, low-load schedule.

"We've run all the numbers and it is still a very profitable proposition. Is it as profitable as it used to be? No, but that's margin pressure across all of the businesses. This is not a loss leader," Mr. Wellum said.

Despite continued negative press, AIC's fundamentals continue to improve, he said. Customer losses are declining and gross sales are up. Investment performance is on the rebound, including the firm's much-maligned AIC Advantage and Advantage II Funds.

In fact, Mr. Wellum made a bold prediction: New global funds and portfolio products will end AIC's many, many months of net redemptions this fall. Assets under management have slipped to about $9-billion, down from a 2002 peak of about $15.4-billion.

"It is a constant battle and we are determined to win," Mr. Wellum said. "We are making money, don't worry about that. No one has to have a charity event for Michael."

Crocus difficulties sprout

There's a new wrinkle in the potential resurrection of troubled Crocus Investment Fund.

Deloitte & Touche, the court-appointed receiver of the labour-sponsored fund, wants to sell 70 per cent of its assets as soon as possible. The auction could scuttle GrowthWorks Capital Ltd.'s proposal to fold Crocus into an existing fund managed by the Vancouver asset manager. Under the plan, each of Crocus's 34,000 shareholders would receive $1.50 in cash and an estimated $4.43 worth of shares in the $327-million GrowthWorks Canadian Fund Ltd.

Talks are continuing, but the Manitoba Court of Queen's Bench may have to step in. Deloitte & Touche contends that the GrowthWorks offer has triggered a process that will grant the 39 Manitoba companies that make up the Crocus portfolio the right of first refusal on interests held by the fund. GrowthWorks, meanwhile, claims its plan is a merger and not a takeover and serves the best long-term interests of shareholders.

Many Crocus investors are backing the GrowthWorks plan and want to stop the potential fire sale. A shareholders' meeting is expected by the end of the month.

Trading in Crocus, one of the country's largest labour-sponsored investment funds, was halted in December, 2004, when concerns about the true value of the fund surfaced. Last May, Manitoba Auditor-General Jon Singleton issued a report saying the fund's operators misled shareholders by overstating its value.

Manager says Canada has legs

"Anybody selling Canada short right now is way too early. . . . You put in some of these new commodity prices we have been experiencing and assume they last a little bit longer, and a lot of these stocks don't look expensive. . . . How much, how many, what percentage of cyclicals do you put into a portfolio that you are comfortable with? I'm struggling with this every day." -- Chuck Roth, conservative growth fund manager at Mackenzie Financial, of the Toronto Stock Exchange's surge this month to a record 12,342 points.

kdamsell@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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