The mutual fund dealer space is showing signs of growth after a decade of dealers closing up shop or consolidating with one another.
According to data from the Mutual Fund Dealers Association (MFDA), the number of mutual fund dealers operating in Canada dropped substantially to about 90 in 2018 from about 160 in 2008, just before the global financial crisis hit.
But for the first time in a decade, the number of mutual fund dealers operating in Canada is on the rise as several new firms have joined the fray. Ian Strulovitch, director, public affairs at the MFDA, says the self-regulatory organization admitted five new members during the past 12 months: Amerity Wealth management Inc. (June 13, 2018); Belay Wealth Inc. (June 14, 2018); Wealthsimple Advisor Services Inc. (Oct. 4, 2018); Wealthforce Inc. (March 4, 2019); and Agora Dealer Services Corp. (April 12, 2019).
So, what’s changed? Matthew Latimer, executive director of the Federation of Mutual Fund Dealers says many of the new dealers are highly innovative and implementing new technologies that facilitate many of the administrative, regulatory and compliance challenges that have eaten up significant time, money and human resources at smaller firms in the past.
“Mergers and acquisitions were the principle reason for the number of members declining over the past decade, in conjunction with the increasing regulatory burden,” Mr. Latimer says. “That made it very difficult to be a successful small dealer.”
The introduction of the second phase of the client relationship model reforms, which ushered in enhanced cost and performance disclosure, among other changes, caused headwinds for all dealers. Smaller firms were particularly hard hit and were either sold off to competitors or closed up shop entirely.
“For very small businesses, it became increasingly difficult to cope with these changes,” Mr. Latimer says.
But advances in technology are helping to level the playing field and make it easier for new firms to operate. In fact, Dahlin Sabey, co-owner and founder of Calgary-based Belay Wealth as well as a veteran certified financial planner (CFP), says launching a new mutual fund dealer would not have been possible just a decade ago.
“The technology wasn’t available,” he says about innovations such as those that have allowed the use of electronic signatures as well as software that’s able to pore over documents to ensure they meet compliance regulations.
Even once these new technologies took hold in other industries, the mutual fund industry took a long time to embrace them, says Neil Lecky, president of Toronto-based Wealthforce, a new mutual fund dealer for independent advisors: “Innovation in our industry has moved at a very, very slow pace for many years.”
The introduction of robo-advisors approximately five years ago helped usher in change, offering automated portfolios of exchange-traded funds (ETFs) at low cost relative to the traditional advisor model, he adds.
“Now, our technology allows us to offer that similar robo-advisor experience, but with an advisor behind it to support clients,” Mr. Lecky says.
Automation – especially for the administrative tasks – also has been attractive to advisors as it frees them up to serve clients’ retirement, tax, investment and estate planning needs, Mr. Lecky adds.
Michael Thorpe, founder, president and senior advisor at Toronto-based Blackwell Financial, says the focus on technological innovation – including the ability to use e-signatures – is the key reason why he’s now running his practice through Wealthforce.
“If I have a client who is a half hour to an hour away, having the [ability to use] e-signatures … [it] reduces the amount of time that I have to spend on the road significantly,” he says.
Furthermore, Mr. Thorpe says he now has more freedom to leverage social media with Wealthforce whereas his former dealer – which he says is one of Canada’s largest – restricted advisors from certain social media platforms and posting original content.
Ken Parker, chief financial officer at Belay and a longtime mutual fund industry executive, says it’s true big firms have difficulty adapting to change as quickly as a new firm designed around innovation.
“Most dealers out there are well-established, very large and have lots of legacy issues [with technology] that make it [difficult to implement] big changes,” he says.
As such, Canada’s largest robo-advisor firm, Toronto-based Wealthsimple Inc., also is banking that its strength in technology will help attract independent MFDA-licensed advisors to its new mutual fund dealer, Wealthsimple Advisor Services.
Jean-Francois Courville, CEO of Wealthsimple Advisor Services, says the parent company used technology to capitalize on the increasing popularity of low-cost ETFs. But as the robo-advisor’s business grew, management realized that many Canadians still want to work with advisors and have a face-to-face relationship.
Previous to the launch of Wealthsimple Advisor Services, Wealthsimple had worked with advisors on a referral basis through Wealthsimple for Advisors, which has been available since 2016.
That service offers access to passive ETF portfolios as well as more actively managed strategies. Yet, because Wealthsimple for Advisors is not a dealer, independent advisors had to give up the investment management component of their businesses.
“We sought to use the technology to make good advisors great and liberate them to serve their clients better and grow their business,” Mr. Courville says.
Wealthsimple Advisor Services can provide a complete suite of services for independent MFDA-licensed advisors, including a lineup of mutual fund portfolios, allowing them to maintain the entire client relationship.
“By offering these model portfolios, we’re creating an advisory environment that is not weighed down by the complexity that exists in the legacy dealers, which more often than not grapple with 40,000 mutual fund codes, creating all kinds of issues,” he says.
Mr. Courville further notes that Wealthsimple’s entry into the space demonstrates mutual funds remain in high demand – and although some traditional MFDA dealers have disappeared, new ones have emerged that have embraced the role new technologies can play in helping advisors run their businesses.
“Everybody thought technology would accelerate the downfall of the advisor,” he says. “That’s a bit misguided. In reality, technology empowers good people to do a great job, in turn validating why many us got into the business in the first place.”