Mutual fund advisers will now be able to more easily sell ETFs

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Exchange-traded funds will now be more readily available to investors as an industry solution announced Tuesday will provide mutual fund advisers direction on how to sell ETFs.

Unlike mutual funds, ETFs are sold on an exchange. Currently, mutual fund licensed representatives can trade in exchange-traded funds that meet the definition of a mutual fund under securities legislation. This includes the majority of ETFs in the marketplace.

According to a recent survey conducted by Toronto-based Credo Consulting Inc. in partnership with TC Media's Investment Group, 34 per cent of advisers who do not use ETFs  said the main reason for that is that they do not hold the appropriate licence. But the misunderstanding in the industry is that mutual fund advisers are not required to hold a securities licence to sell ETFs.

The problem for the majority of mutual fund advisers is that they do not have access to an exchange in order to settle the trade.

The Canadian ETF Association (CEFTA), along with the Federation of Mutual Fund Dealers (FMFD), announced mutual fund dealers would soon be able to provide advisers access to an exchange through a partnership with custody and trade execution provider National Bank Correspondent Network (NBCN). The solution was announced at the FMFD conference earlier Tuesday.

"Providing mutual fund advisers access to these products will allow them to service those clients who may be looking to access ETFs through another provider or referral arrangement," says Ken Parker, chief compliance officer at Portfolio Strategies Corp.

NBCN will provide custody, trade executions and clearing services to mutual fund dealers for certain ETF products. The services will be provided through a single omnibus account per mutual fund dealer. NBCN will execute the trade on market and send confirmation and trade files directly to the dealer.

"The arrangement that we can facilitate is pretty straight forward for those in the industry and not as technical as some may think," says Christine Rodrigues, senior vice-president relationship management and business development at NBCN.

NBCN is still completing beta testing with one mutual fund dealer and has not announced a definite timeline as to when the solution will be rolled out to the industry as a whole. During a panel discussion, Ms. Rodriguez did comment that in order to be considered at an operational level firms must have an electronic connection to NBCB for trade execution as well as be able to track and post at the individual client level in order to perform the proper allocation on the firm's book of record.

There are some restrictions to the access. While there are approximately 81,000 registered representatives as part of the MFDA, only level four mutual fund dealers will be allowed access. (Level three dealers could be included in a second phase rollout).

As well, not all ETFs will be on the product shelf for mutual fund representatives. ETFs that fall under NI-104, such as inverse or leveraged ETFS, would not qualify. ETFS will only be sold in fee-based accounts, and CETFA is recommending that ETFs that have a trailer be eliminated as well.

"ETFs are a fee-based business, so if advisers are already charging a fee they shouldn't be receiving a trailer as well," said Sandra Kegie, executive director of FMFD, who partnered with CETFA in spearheading the working group.

CETFA isn't the first one to announced ETF access for mutual fund dealers. Jamaican billionaire entrepreneur Micheal Lee-Chin opened the doors for his mutual fund representatives at Mandeville Wealth Services Inc. last May.

Unfortunately, the solution was proprietary and did not transfer over to the operations of majority of Canadian mutual fund dealers.

As well, the firm only provided access to those mutual fund advisers who have completed the Canadian Securities Course (CSC). (The CSC course is generally completed by those advisers who work in the brokerage industry and sell securities)

Advisers are required to know the product they sell, and this will continue to be monitored by industry groups and investment firms looking to implement ETF access to mutual fund representatives.

CETFA, along with FMFD, drafted best practice guidelines for those firms looking to enter the ETF business, including a recommendation that mutual fund advisers and dealer supervisory staff mandate the completion of an ETF course.

The MFDA stated in a recent bulletin that approved persons who want to trade in ETFs may require additional proficiency. Earlier this year, the MFDA established an ETF working group and stated results would be used in future policy initiatives.