Hybrid product allows for lower fees.

By Alain Thériault | February 10 2017 07:00AM

Peter Intraligi

Invesco Canada launched its Platform Traded Funds (PTFs) in late 2015. After one year, this new investment vehicle is off to a modest start with $115 million in assets under management, but the company’s CEO predicts a bright future for the product.

PTFs are a hybrid product that combines the features of mutual funds and ETFs. They trade on an exchange without passing through FundSERV, resulting in lower costs for the client.

Invesco Canada’s thirty actively-managed PTF mandates are aimed at fee-based advisors. They are similar to Series F mutual funds, which do not pay commissions. Offered under a stock ticker symbol or as an exchange traded fund (ETF), a Platform Traded Fund trades at end of day net asset value, like a mutual fund. Unlike mutual funds, however, they bypass the FundSERV mutual fund transaction system.

Instead, the PTF is traded through the Toronto-based intermediary Aequitas NEO. Chaired by Jos Schmitt, Aequitas NEO is authorized to register and trade securities and certain structured products, including PTFs. The company describes itself as a neo-exchange.

In a series of responses to frequently-asked questions, Invesco explains that PTFs trade at a lower cost thanks to a simplified process. They are traded through an omnibus account at the fund or full-service dealer’s trading platform. There is no minimum investment threshold. Each trade carries the same fees, regardless of the size of the client’s portfolio.

Limited offering

At press time, Invesco was still the only PTF provider in Canada. The fund company, which specializes in distributing products through the independent advisor channel, had hoped that its competitors would join in to boost supply and provide advisors with more options should regulators decide to abolish commissions.

While PTFs are off to a modest beginning, Invesco believes that other fund companies will enter the niche before long, urged to do so by a growing number of advisors who use the product.

Invesco CEO, Peter Intraligi, said in an interview with The Insurance and Investment Journal that he wants to provide additional resources to advisors who want to make the switch to fee-based management. “The challenge of lower fees, as well as the increasing number of advisors moving to fee-based practices, drove the formation of PTFs,” he explains.

The other entrants to the market, however, are slow in coming. Suppliers and dealers have other priorities. Among others, BMO has the wind in its sails with its ETF-based mutual funds. Alain Desbiens, the vice president of Sales for Quebec and Atlantic Canada at BMO ETFs, reveals that as of Sept. 30 his firm had $5.5 billion in assets under management in its BMO ETF mutual funds.

He plans to continue taking this route to reach advisors, although he says it does not preclude a detour into PTFs. “In the short term, we will continue to launch ETF-based mutual fund portfolios and segregated funds. In the medium term, we might launch PTFs. I cannot tell you any more at the moment,” he commented.

He says he still believes that the mutual fund platform is the simplest way to provide portfolios or ETF solutions. “FundSERV is a platform that works very well for independent advisors,” explains Desbiens.

National Bank Financial partnered with Invesco during the PTF test phase in 2015. The securities dealer’s vice president and head portfolio manager, Louis Bérard, says his firm’s entrance into the market was fortuitous. “We tried it with them at their request, and it worked because we had compatible transaction technology. Our systems made it possible, but not all brokers have these kinds of systems,” he says.

During this test phase, the bank subsidiary noticed that there was a pent-up demand for this type of product. “Sales were strong enough initially. Customers with fee-based accounts followed. The initial demand was met. Now we would like to see other manufacturers offer PTFs,” says Bérard. Only his securities advisors distribute PTFs. At the moment, he does not believe that National Bank is considering extending this product to investment representatives in its retail banking network.

Securities-licensed advisors at Peak Financial Group have been using PTFs to diversify client portfolios since April. The firm is hesitant about expanding the program any further to include mutual fund advisors at PEAK Investment Services. “We are not offering our investment representatives access to them right now, but we may do so,” says Caroline Combes, director of Marketing, Communications, and Public Relations at PEAK.

Combes points out that, like ETFs, advisors who wish to offer PTFs must go through additional training. “We are not making them available to our investment representatives yet, since we have just done so for ETFs. We want to go slowly, enrich the ETF offering and see how the PTF market evolves. For now, there is only Invesco, but we believe that other players will arrive eventually. “


Alain Huard, Quebec vice president at Invesco, hopes so too. He points out that the platform has done particularly well in discretionary management, a niche market of high net worth accounts, and it is now becoming democratized. “It will open up to everyone, especially with what is happening with fee disclosure and the proposals that may put an end to embedded commissions.”

Invesco decided to entrust Aequitas NEO with its platform in order to attract interest from other firms. On its website, the Toronto-based exchange says it is authorized to list and trade securities and certain structured products. “We invented the PTF, but we sold the rights in an exclusive agreement with NEO Connect,” says Huard. “NEO is in talks with other mutual fund companies to include PTF versions of their funds on its platform. However, we do not know the launch dates for these firms.”

Invesco sold its platform to Aequitas NEO. “This exchange is open to competitors and it handles the business for Invesco. Other suppliers could come on board. There are several interested parties,” says Huard. He notes that there are currently twelve brokerage firms that have signed an agreement to distribute PTFs with NEO. “In addition, three other firms are currently in a testing phase.”

Competing intermediaries

Competing intermediaries are also emerging. Indeed, the Toronto Stock Exchange has established the TSX NAVEX. It says on its website that its platform “brings the unique benefits of an exchange-traded model to mutual funds”, and adds that it plans to post products similar to F-series (fee-based) funds on the platform. “The platform is designed to bridge the gap between mutual fund providers or advisor-managed discretionary programs, and fee-based platforms,” reads the web site.

“The TSX platform that was just announced is probably similar,” says Huard. “However PTFs will not be one of the products they can trade, since they do not have the distribution rights.”

Huard says the PTF platform allows transaction fees to be reduced by 40% to 50%, because it is its own system. Trades do not go through the FundSERV transaction network for investment funds.

“There are PTFs with a 0.90% management fee. The administration costs are also lower. Since FundServ is not involved, record keeping is done at the dealer level, and it distributes the units to clients’ accounts. So there is no more statement of account.” PTFs also allow for wholesale trading. “The broker buys and sells units for everyone at the same time,” says Huard.

At National Bank Financial, Louis Bérard confirms that PTFs’ low costs appeal to clients who are paying fees for both discretionary and non-discretionary asset management. “We treat it as a traditional mutual fund traded on Fundserv, but since the PTFs trade on their own system, clients enjoy certain savings. Depending on the product, savings can range from 10 to 40 basis points (0.10% to 0.40%). That is why they are so attractive to us.”

Other options vie with PTFs for the attention of fee-based advisors

While Invesco is promoting its Platform Traded Funds (PTFs), other companies are launching other innovative mutual fund products and even ETF-based segregated funds.

BMO ETFs intends to stick with mutual fund ETFs because they can trade through FundSERV, its platform of choice for reaching advisors. The company uses this channel to offer more than 25 tactical and strategic portfolio solutions.

“We are continuing to provide and increase ETF portfolio solutions and individual ETF solutions via FundSERV,” says Alain Desbiens, regional director for Quebec and the Atlantic provinces at BMO ETFs. The company has recently added covered call options to its dividend strategies portfolio.

“ETF-based mutual fund strategies with low volatility are now available as segregated funds,” says Desbiens. He explains that advisors with BMO Insurance wanted access to lower-cost solutions.

Desbiens emphasizes the neutrality of the compensation model. “The commissions built into the funds are impartial, regardless of the portfolio structure,” he said.

Raja Khouri, a director at BMO Life Insurance in Toronto, explains that BMO’s ETF-based segregated funds allow three sales charge options to coexist in a portfolio: initial sales charge, no-load, and deferred sales charge. “Regardless of the fund chosen, be it 100% in fixed income or 100% equities, compensation remains the same. This encourages the fair treatment of the client,” he says.

Alain Desbiens believes simple, transparent, low-cost solutions are definitely in favour. He says this is especially given CRM2’s disclosure requirements: he refers to the obligation that mutual fund firms now have to disclose the fees that have been charged a client’s account.

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