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Consumer Insights

Consumer Insights offers an exclusive series of articles analyzing the results of the on-going Financial Comfort Zone Study, conducted by Missis­sauga, Ont.-based Credo Con­sulting Inc. in partnership with Montreal-based TC Media's investment group. (Investment Executive is published by TC Media's investment group.) The survey, conducted monthly in English and French, is designed to gain insight into the relationships among financial advice, financial well-being and overall life satisfaction in Canadian society. The number of respondents is expected to grow to 12,000 within 12 months.

High-income individuals and their advisors also prefer mutual funds to stocks, seg funds or ETFs

By Tessie Sanci | December 2016

Although increased emphasis on fee transparency and availability of less costly products are putting pressure on mutual funds, they remain the investment product of choice for investors and financial advisors alike. However, there are signs that ETFs are catching on.

The most recent edition of the Financial Comfort Zone Study reveals that one-third (33%) of Canadians participating in the survey invest in mutual funds, which make these products more popular than stocks, ETFs and segregated funds. Mutual funds also are the product of choice for Canadians who work with advisors, with 46% of those study participants saying they hold these funds, compared with the 27% of Canadians in the advised category who hold stocks and the 25% of advised Canadians who hold GICs.

These findings are from the most recent edition of the study, a national consumer survey conducted by Mississauga, Ont.-based Credo Consulting Inc. in partnership with Montreal-based TC Media's investment group, which publishes Investment Executive. This edition of the survey examined the investment products most popular among Canadians.

Investors and advisors' preference for mutual funds is not surprising, says Hugh Murphy, managing director of Credo: "Mutual funds are well designed to deliver a level of diversification [to fund unitholders] immediately. Setting aside the whole migration toward fee-based accounts, [mutual funds] provide advisors with simple compensation. So, advisors have been motivated to use mutual funds as well over time."

Mutual funds' use of professional investment portfolio managers also is a benefit for advisors, who can be confident that their clients are looked after from a product point of view. This allows advisors to work on their relationships with clients, says Sara Gilbert, founder of Montreal-based Strategist Business Development.

Furthermore, the number of advisors licensed to sell mutual funds undoubtedly plays a part in the product's dominance. For example, there are 83,000 approved persons licensed by the Mutual Fund Dealers Association of Canada, according to that self-regulatory organization's (SRO) 2016 annual report, while the Investment Industry Regulatory Organization of Canada's most recent annual report indicates that SRO has 28,700 approved persons under its watch.

Even advisors who serve high-income individuals make mutual funds the preferred product: 57% of high-income Canadians polled in the study and who work with advisors said they invest in mutual funds, compared with 38% of high-income advised Canadians who invest in stocks.

High-income individuals and their advisors probably are taking advantage of competitive pricing within the fee-based and institutional series of funds, says Dan Hallett, vice president and principal of Oakville, Ont.-based HighView Financial Group.

The overall popularity of mutual funds may be one factor why seg funds continue to be more of a niche product, as they're held by only 5% of advised Canadians who participated in the study.

Many advisors who sell seg funds often sell mutual funds as well, but are likely to stick with a less expensive mutual fund unless a client has a specific need for a seg fund, Hallett says.

Although the number of ETFs and their providers continue to grow in Canada, only 5% of polled Canadians who don't work with an advisor include ETFs in their portfolios. That percentage increases slightly to 6% for Canadians who work with an advisor.

Nevertheless, there are signs that the tide may be turning. Even though sales of ETFs fall short of those of mutual funds, recent figures show that ETF sales are on an upswing, while mutual fund sales are suffering. Data from the Canadian ETF Association indicate that net asset sales of ETFs for the nine months ended Sept. 30 were $12.2 billion, up from $11.4 billion during the corresponding period in 2015. In contrast, data from the Investment Funds Institute of Canada show that net asset sales of mutual funds were $23.8 billion in the nine months ended Sept. 30, down from net asset sales of $49.8 billion in the corresponding period a year earlier.

Growth in the use of ETFs will be driven by clients' increased awareness of investment fees, says Murphy, adding that one particular demographic will take a greater liking to these products: "As the population ages and approaches retirement, [those individuals] are going to take an interest in their financial well-being, which includes focusing on where the nickels and dimes are going."

An increase in the number of advisors who offer ETFs also may boost sales of these products. But, so far, the adoption of ETFs on the mutual fund side of the investment industry has been slow.

Mutual fund dealers and their advisors are waiting for a final ruling from regulators regarding minimum proficiency standards for the sale of ETFs. Hallett expects only an incremental increase in the number of advisors who sell ETFs because advisors must take the time to learn about the products.

As popular as ETFs may become, the consensus is not to count out mutual funds anytime soon, says Gilbert: "There are always going to be shinier products. There now are ETFs and, a few years ago, there were real estate investment trusts. [Advisors must] stay alert about these new products, but, at the same time, they will never [comprise] the majority of a client's portfolio."

Adds Hallett: "Mutual funds will be the dominant product for some time just because their [popularity] is so big."

In addition to the massive hold that mutual funds have on the market, these products are evolving in the face of increasing pressure from lower-cost products such as ETFs. In fact, a growing number of asset-management firms are cutting their mutual fund fees and offering perks such as automatic preferential pricing for higher levels of assets under management, Hallett notes.

The online Financial Comfort Zone Study polled more than 13,000 Canadians. The survey is meant to gain insight into the relationships among financial advice, financial well-being and overall life satisfaction in Canadian society. Canadians are polled monthly, and the number of survey participants will grow each month.

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