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Mutual Fund News

New rules a boon for consultants

The need for independent review committees is creating an opportunity for experienced regulators, KEITH DAMSELL writes


William Woods is ready to make the most of a "peculiarly Canadian beast" -- the independent review committee.

Mr. Woods is president and chief executive officer of Independent Review Inc., a new Toronto consulting firm designed to profit from the mutual fund industry's ever-increasing regulatory burden.

As of Nov. 1, fund companies are required to have an IRC, a team of at least three independent directors advising each fund on conflict of interest issues. The Canadian Securities Administrators have given the industry a 12-month grace period to get organized but IRCs must be operational by November of next year.

There's a mish-mash of preparedness in the industry. A handful of firms, such as Mackenzie Financial Corp. and AIM Funds Management Inc., have independent advisers already in place that can be transitioned to meet the requirement. But the bulk of fund companies have yet to move beyond initial planning stages and many others "have their heads in the sand," Mr. Woods reports. At a recent Ontario Securities Commission event, a room of about 30 mutual fund lawyers was asked whether their fund family had an IRC in place. Not a single hand was raised.

IRI's team of 12 veteran executives has a deep securities background -- chairman Stanley Beck, for example, was chairman of the OSC from 1985 to 1989. The firm will not disclose fees but Mr. Woods expects large fund companies will need to set aside more than $250,000 annually to cover committee expenses, a sum that includes director fees, legal, insurance and administrative costs.

IRI hopes to serve as many as 20 fund companies and build an industry standard at a competitive cost. Agreements with two major fund companies are near conclusion and talks continue with a number of smaller firms.

Raters' split affects marketing

Mutual fund marketing plans are the first victims of a bitter divorce in Canada's fund rating business.

In March, Morningstar Canada left the Canadian Investment Funds Standards Committee (CIFSC), the industry research firm that defines and classifies mutual funds. Morningstar claimed the group was ineffective and moving too slowly when it came to decision-making. Two months later, each organization released its own overhauled fund categories with some significant differences, especially in the income trust and balanced fund categories.

A problem surfaced this fall as the mutual fund industry geared up for the 2007 RRSP sales season. A six-year-old regulatory exemption allows fund companies to use Morningstar fund ratings in their sales and marketing material -- provided they are based on CIFSC categories.

Legal teams hired by the Investment Funds Institute of Canada and the Ontario Securities Commission are reviewing the issue. IFIC, the industry's trade association, is committed to a single fund rating system. To date, talks between Morningstar and the CIFSC have failed and the former partners agree to disagree.

Walton, Partners tie-up stalled

The long courtship between Partners In Planning Financial Services Ltd. and suitor Walton International Group Inc. has hit a roadblock.

Partners, a Regina wealth management firm, and Calgary real estate firm Walton have been in talks for many months, industry sources report. Indeed, many of Partners' rivals in the financial services sector believe a deal had been reached months ago between the two private firms.

But Dennis Planidin, a Partners director, shareholder and executive with Walton's U.S. operations, said "nothing has been settled yet" and added that Walton is no longer directly involved in talks. "We are looking at doing something to improve that entity [Partners] and I'm not sure how it is going to evolve," Mr. Planidin said in an interview from his home in Scottsdale, Ariz. "When the time is right, everybody will know what's happening."

On the surface, a Partners-Walton deal is a strange marriage. Partners is one of Western Canada's largest financial advice firms with about 500 advisers overseeing about $4.4-billion in assets under administration. Walton, meanwhile, is in the land banking business, speculating on the value of large tracts of land on the outskirts of urban centres. It's a controversial investment strategy that financial advisers say is not for everyone.

The two firms have ties that date back to the 2001 bear market. Weak equity markets prompted Partners advisers to search for investment alternatives and Walton's offering fit the bill. Adding further incentive was a heady 9-per-cent sales commission.

The financial services industry continued to consolidate and many Partners' advisers that owned shares in the firm became increasingly eager to sell, sources said. Some of Canada's largest wealth management firms kicked Partners' tires but declined to make offers, citing increasing client exposure to Walton's real estate-focused structured products.

A Walton takeover began to take shape last winter with Partners advisers controlling about 30 per cent of the firm's equity pushing for a deal.

Senior management at Partners declined to comment while Walton's executive team in Canada did not return phone calls.

© 2007 The Globe and Mail. All rights reserved.

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