Advisors in favour of mutual funds

Financial advisors with dealer firms still regard mutual funds as attractive products for their clients and appreciate the proven active fund managers. Advisors continue to hold this view despite the soaring popularity of exchange-traded funds (ETFs).

The results of this year’s Dealers’ Report Card show that advisors continue to be happy with the “quality of firm’s product offering,” giving this category an overall average rating of 8.9 this year vs 8.8 in 2012 and 2011. The advisors most satisfied with their product lineups were those with Mississauga, Ont.-based PFSL Investments Canada Ltd. and Ottawa-based Independent Planning Group Inc., who gave their firms ratings of 9.7 and 9.2, respectively, in the category.

As well, advisors are pleased that there are many mutual funds from which to choose. Says an advisor in Quebec with Richmond Hill, Ont.-based Global Maxfin Investments Inc., which saw its rating in the category rise to 8.7 from 8.0 year-over-year: “There’s a ton of selection for products. The product offering is superb.”

Jeff Dumanski, PFSL’s president and chief marketing officer, says that the mutual funds his firm makes available to its advisors appeal to middle-market Canadians who are not highly literate in financial matters. “For us, and our market of middle-income Canadians,” he says, “the [simplicity] and transparency of mutual funds is something that is a staple in our marketing.”

Much of the attention has been on ETFs lately- and assets invested in these products are growing rapidly. For example, Canadian-domiciled ETF assets were at $58.5 billion as of April 30, a robust 18% increase from a year earlier, according to statistics from National Bank of Canada. In contrast, mutual fund assets, as measured by the latest figures supplied by the Investment Funds Institute of Canada, stood at $909.6 billion as of April 30, a much larger asset base but up by a lower 12.3% vs the previous year.

Although some mutual funds have been criticized for offering index-like returns while charging higher fees than many index-linked ETFs, most advisors and their dealer firms respect the value of the active management that mutual funds offer. Some dealer firms are not licensed to sell ETFs; but even those that are licensed to sell ETFs as well as individual stocks and bonds – including Toronto-based DundeeWealth Inc. and Assante Wealth Management (Canada) Ltd. – prefer mutual funds for their clients even if the costs are slightly higher.

“Well-run mutual funds are providing a lot of value for that cost difference between an ETF and a managed portfolio,” says Steve Donald, Assante’s president and CEO, who adds that a balanced ETF portfolio can be put together for roughly 35 basis points (bps) in management fees as a percentage of assets while a comparable portfolio of advisor-class mutual funds might cost 100 bps. “We think about the advantage of some of the active-management capabilities on mutual funds, the strategic [and] tactical rebalancing.”

“There are a lot of things that mutual funds can do that ETFs cannot do,” adds John Bai, DundeeWealth’s senior vice president of wealth-management strategy. “Corporate-class mutual funds are much more tax-efficient for clients as they accumulate assets. And as [clients] go in de-accumulation mode, you can have much more tax-efficient distribution through a corporate-class mutual fund than through an ETF.”

Advisors with Bank of Nova Scotia-owned DundeeWealth, who have plenty of mutual funds to choose from, are happy with their broader product line. Says an advisor in Ontario: “We have a great war chest to pull from.”

Many of the cost comparisons between ETFs and mutual funds are misleading, Donald says, because the costs included in mutual fund management fees cover the amount paid to the advisor for advice. In contrast, ETF fees often don’t include a component for advice, which is charged separately in the form of sales commissions or an annual advisory fee.