Some vendors are still working on building the necessary capabilities into their platforms to enable dealers to accommodate ETFs; others have systems ready to go
Mutual fund dealers are getting closer to adding exchange-traded funds (ETFs) to their product shelves in greater numbers as regulators finalize proficiency requirements in this market and firms work to establish the infrastructure necessary to facilitate trading of these products.
So far, only one fund dealer in Canada sells ETFs; however, as soon as this year, financial advisors could see more dealers enabling ETF sales – a move that could expand the product’s distribution platform significantly.
“There are around 81,000 mutual fund representatives out there right now who don’t have the ability to transact in ETFs,” says Atul Tiwari, managing director of Vanguard Investments Canada Inc. and chairman of the Canadian ETF Association (CETFA) in Toronto. “So, by coming up with a solution that would allow [these advisors] to transact in ETFs, that opens up quite a large new channel for the ETF product.”
Although mutual fund dealers and their reps are permitted to sell ETFs under the regulatory framework, there are various hurdles associated with making ETFs available to their clients. One obstacle is that mutual fund dealers don’t have access to a securities exchange, says Sandra Kegie, executive director of the Federation of Mutual Fund Dealers (FMFD) in Toronto: “Mutual fund dealers aren’t set up to transact business with an exchange. That’s the piece that is missing for them.”
In 2014, Burlington, Ont.-based Mandeville Wealth Services Inc. became the first member of the Mutual Fund Dealers Association of Canada (MFDA), a self-regulatory organization (SRO), to sell ETFs. That firm was able to leverage the infrastructure and back-office relationships already in place at Mandeville Private Client Inc., an investment dealer owned by the same parent company, to facilitate access to ETFs.
For mutual fund dealers that don’t have access to such infrastructure, the process can be more complicated. “There are new processes that dealers need to create,” says Paul Strijckers, vice president of business solutions at Broadridge Financial Solutions (Canada) Inc. in Toronto. “There are educational processes, compliance processes, operational processes and business relationships. So, it is a big decision for firms to make.”
The FMFD has been working with CETFA over the past few years to come up with a process that mutual fund dealers can use to transact in ETFs, and the organizations are now satisfied that they’ve developed a solution that works.
“We’re ready to tell our members to go ahead,” says Kegie. “We’ve been working for several years now with all of the regulators and with the industry, putting together best practices … and, basically, [the necessary work] is done.”
Now, individual firms must take the steps necessary to make the products available to their clients. “Now, [providing access to the ETF market] truly will come down to logistics,” says Pat Dunwoody, executive director of CETFA. Specifically, MFDA dealers keen on selling ETFs will need to find a securities dealer to partner with in order to get access to the necessary securities market infrastructure. Those dealers also will need to ensure their back-office system is equipped to handle ETF transactions.
Some platform vendors still are working on building the necessary capabilities to enable dealers to accommodate ETFs; others have developed systems that are ready for deployment. Broadridge Canada, for example, developed the platform used by Mandeville Wealth’s mutual fund reps.
“Our technology was already structured in a way that enabled us to execute on this fairly quickly and leverage some of the investments we’ve already made within the platform, for similar instruments,” says Michael Dignam, president of Broadridge Canada.
Once the infrastructure is in place, dealers will need to address the issue of training their reps and back-office staff. There are key differences between ETFs and mutual funds, and the regulators have indicated that reps must receive a certain level of training to sell ETFs – both in general product features and the dealer’s specific procedures for transacting in ETFs. The MFDA is developing proficiency standards for this. The SRO released a set of proposed standards in July 2015, and plans to develop rule proposals this year.
In the meantime, dealers that are ready to proceed with ETF transactions should develop their own training programs and proficiency requirements for their reps, using the proposed MFDA standards as guidance, Kegie says.
Dealers also need to decide which ETFs to include on their approved products list. Not all ETFs are eligible for distribution in the MFDA channel. Those products that fall under the commodity pools regulations – such as leveraged ETFs – will not be available through mutual fund dealers.
“[Those products comprise] a small group,” Dunwoody says. “They’re the ones that are more complicated. They’re not necessarily investments – they’re more trading vehicles.”
Although ETF sales are likely to take some time to gain momentum in the MFDA channel, Tiwari says, dealers and advisors alike have expressed considerable interest.
Nelson Cheng, CEO of Windsor, Ont.-based Sterling Mutuals Inc., says he is exploring the possibility of selling ETFs. He surveyed his reps about two years ago to gauge interest and was surprised at their enthusiasm: “There was quite a bit of interest.”
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