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Independent fund companies are struggling to survive in an industry that is dominated by Canada’s Big Six banks, which has scooped up smaller players in the past decade. (Fred Lum/The Globe and Mail)
Independent fund companies are struggling to survive in an industry that is dominated by Canada’s Big Six banks, which has scooped up smaller players in the past decade. (Fred Lum/The Globe and Mail)

FINANCIAL SERVICES

Banks taking share from independent mutual-fund firms Add to ...

Deposit-taking institutions, which include banks and credit unions, are gaining a larger piece of the pie in mutual fund sales as industry competitors struggle to infiltrate strong bank branch networks.

Independent fund companies, such AGF Management Ltd. and Fidelity Investments Canada, are industry players that are not owned by a bank, credit union or life insurance company.

A decade ago, the independent fund companies accounted for 57 per cent of the net assets in the industry, while the banks and credit unions only made up 31 per cent, according to research conducted by Investor Economics.

Today, the banks and credit unions have surpassed the independents with 47.5 per cent of market share, while the independents have dropped to 42 per cent.

Independent fund companies are struggling to survive in an industry that is dominated by Canada’s Big Six banks, which has scooped up smaller players in the past decade. In 2001, Bank of Montreal scooped up Guardian Capital Group, while in 2008, Royal Bank of Canada acquired Phillips, Hager & North Investment Management Ltd. The Bank of Nova Scotia beefed up its fund lineup in 2011 with the acquisition of Dynamic Funds and the entire group of financial advisers that held many of those funds at HollisWealth Inc. (formerly Dundee Wealth).

Since 2004, the banks have been ramping up their wealth-management strategies and as a result have created networks with more than 13,000 branch advisers armed to service Canadian investors.

But these distribution channels, which sell a large proportion of in-house or proprietary products – such as bank-branded mutual funds – are becoming one of the biggest challenges for the independent fund companies to overcome.

“The distribution of proprietary product has been a major issue in the wealth management industry in Canada for quite some time,” said Rob Strickland, president of Fidelity Investments Canada ULC, during a panel discussion at the Federation of Mutual Fund Dealers’ conference last month. “And it is getting worse with each passing year.”

In order for independent fund companies to sell their funds to a client, they need to get in front of a distribution network. Many independent fund companies find it difficult to gain access to those financial advisers who work at organizations that are directly linked to a mutual fund company.

In the brokerage business, financial advisers are given more freedom when it comes to selecting which products they are able to offer clients. Even advisers working at bank-owned brokerages can include product offerings from major independent players such as AGF and Invesco.

But for many advisers, compensation bonuses are directly linked with the overall performance of their own firm – including the company’s investment management division.

“This situation puts the adviser in a really awkward position,” said Peter Intraligi, president and COO of Invesco Canada. “If your compensation plan has you on a grid, which includes getting shares in that company, well that puts you in a really difficult position as a financial adviser.”

Darren Coleman, an investment adviser and portfolio manager with Raymond James Ltd., says the push to sell in-house funds and products factored into his decision to leave his former firm. After working 20 years for bank-owned brokerages, Mr. Coleman no longer wanted the pressure of offering the bank’s products over what was best for his clients.

“As a branch manager I was continually advised to be telling our advisers the benefits of our bank products, as well the bank wholesalers are given preferred access to the advisers over independent fund companies and that didn’t sit right with me,” Mr. Coleman said.

“Certain in-house products would also share a higher portion of the management expense ratio [MER] with the adviser than if they were to choose third-party products,” he said.

“Some advisers would reject that approach,” Mr. Coleman said. “But others see it as a way to butter their bread.”

As a whole the independents are a mixed bag in terms of sales results, with some fund companies doing exceedingly well and others reporting quarters with net redemptions.

In the first quarter of 2015, independent fund companies accounted for 22.5 per cent of the industry’s net flows, or sales, according to the Investor Economics Insight Advisory Service’s April report. Five years ago, it was 39 per cent.

The report also shows that 92 companies reported net flows in the first quarter of 2015. However, 36 ended the 2015 RRSP season, which is usually a strong sales period, with net redemptions – when clients cash out more than they put in. That’s up from 27 last year; of those the majority were independents.

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