CRM2 likely to accelerate advisors’ move to fee-based model

By Susan Yellin | March 31 2015 10:00AM

CRM2, the new cost and performance requirements by Canadian regulators on mutual fund dealers, is likely to accelerate the number of advisors moving into fee-based accounts.photo_web_1094Total assets in unbundled, fee-based assets in 2007 stood at $66.4 billion or 9.4% of long-term funds. That number rose in 2013 to $139.5 billion, or 13.7% of long-term funds, says Guy Armstrong, senior consultant and managing director at Toronto-based Investor Economics. The bulk of these assets were at full-service brokerages.

“That’s up quite dramatically,” says Armstrong. “That’s higher for the big six firms than it is for the independent firms, but the independent firms are catching up quite quickly.”

Armstrong says the numbers are much lower in the financial advisor channel because, right now at least, there is “economic indifference” to the model from both the advisor and clients: while that channel handles 90% mutual funds it also already carries a fee on assets – but in this case those fees are embedded.

“The impetus to repaper an entire account and move it into a fee-based account is indifferent from both the advisor and the client because the fees stay the same. In that world, the unbundled programs are much lower as a percentage of assets – it would be under 5%,” says Armstrong.

Anecdotally, he says, there’s more discussion now about moving to fee-based accounts from mutual fund dealers. “We are definitely seeing a rise. Those fee-based numbers were pretty close to 0% only a few years ago and they are up around 2% now.”

While CRM2 deals with enhanced disclosure of the costs of investing in mutual funds and improves reporting on account performance, it also gives advisors the ability, on a discretionary basis, to modify and adapt the pricing model, says Goshka Folda, senior managing director at Investor Economics.

Even though there has been a much more determined interested in unbundled, fee-based models on the part of advisors and dealers, unbundling does not necessarily translate into lower fees for investors, says Folda.

The increase in the number of fee-based accounts has recently been echoed in a white paper written by Equisoft, a Montreal-based software consulting firm.

Main source of growth

“Fee-based businesses – both discretionary and non-discretionary lines of business – have already outstripped transactional business as the main source of growth for full-service brokers,” states the report.

Equisoft’s paper is based on a number of confidential interviews with industry participants in Ontario, Quebec and British Columbia. It included senior management of dealer firms (both those regulated by the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association (MFDA), as well as back-office vendors, industry associations, investment product manufacturers and members of the business media.

The paper cites one IIROC member as saying that the amount of commission-based business it does has dropped to half of all business today from 80% a decade ago.

Folda notes that unbundled fees may not be work for every advisor, especially those in the lower- to mid-range of assets.

The Equisoft paper also said that some advisors may give up their investment licenses to focus entirely on financial planning on a fee-for-plan basis with investment purchases referred to a portfolio manager.

Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada (IFIC), says moving to fee-based is a natural evolution and shift within the industry.

IFIC does not keep track of the numbers and De Laurentiis is not sure the number of fee-based accounts is increasing faster because of CRM2. “But certainly there is an underlying move to offering an option for a fee-based account that has been on a growth curve for a few years now.”

De Laurentiis notes that in the United Kingdom, where commissions have been banned, it’s the smaller investor who has been hurt.

“You really want a marketplace that allows all options,” she says.