The adage that mutual funds are sold - not bought - rings truer than ever these days.
More institutional money managers, which once sold no-load funds directly to the public or through discount brokers, are now wooing financial advisers with so-called "trailer fees," or boosting them higher.
This yearly fee - up to 1 per cent or more of assets held by an investor in a fund - is paid by the company to advisers to compensate them for continuing service to clients.
Toronto-based Saxon Financial Inc. recently raised its trailer fee to 1 per cent on its stock and balanced funds for its new "adviser series," which also comes with a higher management expense ratio (MER).
Last summer, Vancouver-based Phillips Hager & North Investment Management Ltd. (PH&N) began paying a trailer fee for the first time. Its new series aimed at advisers pays up to a 0.5-per-cent annual fee.
And Halifax-based Seamark Asset Management Ltd., which launched three funds last fall, didn't bother selling directly to the public. Instead, it pays advisers a higher, 1.25-per-cent annual trailer fee on its funds.
"It's a tough go if you don't have a sales force or some sort of adviser network recommending your products," said Dan Hallett, a Windsor, Ont.-based fund analyst.
"There are tens of thousands of advisers selling financial products to individuals," he said. "If you can get just a small percentage of them to like your story ... that can really bring in a lot of money."
Saxon Financial chief executive officer Allan Smith agrees. "Our share of the marketplace is small, relative to what we think is possible and what other mutual fund companies have," he said.
Advisers wanted a 1-per-cent payout compared with the old trailer capped at 0.5 per cent, he said. This puts Saxon on the same level as major fund firms selling through brokers and mutual fund dealers.
Some rivals only offer an annual trailer of up to 0.2 to 0.25 per cent. They include Sceptre Investment Counsel Ltd., Beutel Goodman Investment Counsel Ltd., McLean Budden Ltd., and Mawer Investment Management Ltd.
But there are holdouts. Vancouver-based Leith Wheeler Investment Counsel Ltd. and Steadyhand Investment Funds Inc., which opened last fall as a direct seller of no-load funds, do not pay any trailer fees.
Steadyhand CEO Tom Bradley, who also writes a column for Report on Business, said his business is aimed at a "small sliver" of do-it-yourself investors emerging from the aging baby boom demographic. "Lots of people are skeptical of what we are doing," he conceded.
He was formerly CEO at PH&N, which has now opted to target advisers in addition to being a direct seller.
Richard Self, a vice-president at PH&N, said the move is in recognition of "the value of advice." It also reflects a trend noted in a report by Investor Economics that do-it-yourself investors in Canada have declined to about one-third of the market from two-thirds about 10 years ago, he said.
Morningstar Canada analyst Mark Chow said that some do-it-yourself investors began seeking advisers after being "burned" when the 2000 technology bubble burst. They were buying the next hottest tech fund, he said.
Seamark CEO Stuart Raftus, said his firm decided to target advisers only because they were already familiar with his firm's products as part of wrap programs - packaged fund portfolios sold by banks. He said advisers were also familiar with Seamark through funds it once ran for Clarington Corp.
Clarington, which became IA Clarington Investments Inc., after its purchase in 2006 by Industrial Alliance Insurance and Financial Services Inc., withdrew $3-billion in mutual fund money run by Seamark.
Mr. Raftus said that Seamark's 1.25-per-cent trailer on its new funds is merely a reflection of the importance of the adviser relationship with clients. "We feel that they should get paid for that," he said.
But Mr. Hallett sees Seamark's higher-than-usual trailer fee as a way "to get attention" from advisers.
"It works with some advisers," he said. "But I have also talked to advisers who are afraid of the optics of selling something that pays more than the standard commission."
Taking care of business
Some no-load fund companies are trying to win more business with higher trailer fees
|Fund||Minimum investment||MER||Trailer fee|
|Steadyhand Equity ( Series A)||$10,000||1.35%||nil|
|Leith Wheeler Canadian Equity ( Class B)||$25,000||1.47%||nil|
|Beutel Goodman Canadian Equity ( Class A)||$5,000||1.39%||0.25%|
|McLean Budden Canadian Equity ( Class A)||$10,000||1.25%||0.25%|
|Mawer Canadian Equity ( Class A)||$5,000||1.18%||0.20%|
|PH& N Canadian Equity ( Series A)||$25,000||1.13%||n/a|
|PH& N Canadian Equity ( Series B)||$5,000||1.63%||0.50%*|
|Sceptre Canadian Equity ( Class A)||$5,000||1.69%||0.25%|
|Saxon Stock Fund ( Investor series)||$5,000||1.84%||0.50%|
|Saxon Stock Fund ( Adviser series)||$5,000||2.26%||1%|
|Seamark Canadian Equity ( A series)||$5,000||2.25%||1.25%|
SOURCE: DATA BY SHIRLEY WON
* MER is an estimate that simply adds trailer fee to MER of Series A.
** The minimum investment numbers is required if one holds no other funds with the firm.
© 2007 The Globe and Mail. All rights reserved.
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