advisor with client

Fewer clients are using funds with deferred sales charges, but the funds still make up a significant portion of assets for advisors with smaller books of business, data released from the Mutual Fund Dealers Association of Canada (MFDA) says.

The proportion of deferred sales charge (DSC) funds — including low-load funds — held by all clients decreased by nearly one-third (31%), or $34 billion, from 2016 to 2018, according to the MFDA’s 2020 client research report.

The report aggregated data provided by members anonymously in 2018. The previous client research report was released in 2017 and based on 2016 data.

The report built on data released last month showing that a large proportion of households served by MFDA advisors are mass market (less than $100,000 in cash and investments).

These mass-market clients continued to have the highest concentration of deferred sales charge funds (33% of assets), the report said. And DSC funds made up almost half the assets of advisors with books under $2 million.

The report also said MFDA clients held about $1 billion in other investment products that were subject to DSCs and sold outside MFDA firms — mostly segregated funds and principal-protected notes.

As advisors’ books of business grow, they tend to finance their business through ongoing trailing and fee-based commissions, the report showed.

The number of advisors licensed with financial advisory firms (as opposed to banks and call centres) decreased 17% from 2016 to 2019.

“This decrease is largely a result of members prohibiting the sale of DSC funds, which small book advisors rely on to finance their operations,” the report said. “This illustrates the independent nature of the employment relationship of advisors in the Financial Advisory channel.”

Since 2016, the proportion of mutual funds — F-class and non-embedded funds — in fee-based accounts increased by 53%, or by $35 billion, representing the greatest growth in mutual funds over the period.

The average cost for fee-based programs holding F-class funds ranged from roughly 0.49% of assets for the wealthiest households (at least $1 million in assets) to 0.66% for the least wealthy ($100,000 to $250,000 in assets). (These costs didn’t include fund management fees.)

No-load funds continued to be the most common type of fund held by MFDA members, representing about 53% of all investment fund assets under administration.

The average cost paid by all MFDA-served households was 0.83% of assets (excluding fund management fees).

While more MFDA members have offered ETFs over the last couple of years, the report said, ETFs are available only in fee-based programs, and mass-market clients generally don’t have access to fee-based accounts.

“Accordingly, we expect there will be an increase in members offering ETFs to mid-market and affluent clients in the future, but it is not clear whether this will be the case for mass-market clients,” it said.