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Advisor News Regulatory requirements impeding access to ‘liquid alts’ for many investors

Financial advisors need to have successfully completed one of the Canadian securities course, the derivatives fundamentals course or the charted financial analyst program in order to sell liquid alts to their clients.

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The Canadian Securities Administrators’ new rules allowing for the introduction of “liquid alternative” retail investment funds, which came into effect on Jan. 3, were meant to give retail investors access to investment strategies such as short-selling, leveraging and derivatives that have been traditionally out of reach and available only to institutions and more sophisticated, wealthier investors. However, a significant proportion of financial advisors still cannot offer “liquid alts” to their clients.

That’s because advisors need to have successfully completed one of the Canadian securities course (CSC), the derivatives fundamentals course or the charted financial analyst (CFA) program in order to sell liquid alts to their clients. For advisors who are licensed to sell securities through an Investment Industry Regulatory Organization of Canada-licensed investment dealer already meet the criteria as they have, at minimum, completed the CSC. But the large segment of advisors who have completed a licensing course to sell mutual funds through a mutual fund dealer licensed by the Mutual Fund Dealers Association of Canada (MFDA) do not.

As a result, MFDA-licensed advisors must take one of the necessary courses in order to meet the proficiency requirements for selling liquid alts, which “seems like an extra, unnecessary burden,” says Matthew Latimer, executive director of the Federation of Mutual Fund Dealers.

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Not only are these requirements a major hurdle for MFDA-licensed advisors, but their clients could be the ones who suffer as a result, Mr. Latimer says. Given the late stage of the current bull market, the alternative strategies that liquid alts offer are designed to provide diversification and downside risk protection.

“Canadians need to protect their portfolios and traditional mutual funds are long only,” Mr. Latimer says, “and the longer it takes for mutual fund investors and more conservative clients to get access to these products, the worse the next downturn is likely going to be for them.”

But given the complexity of the strategies that liquid alts employ, some believe having the extra proficiency requirements is a must.

“I think there is a real need for a certain amount of knowledge regarding the strategies used,” says Maglan Naidoo, an investment advisor at Canaccord Genuity Wealth Management in Edmonton, who sees tremendous value in being able to offer liquid alts to his clients.

Mr. Naidoo currently uses three liquid alts for his clients’ portfolios, but because of the “current rush of new products” in this space, he believes advisors are faced with having to sort through many new offerings. Although many of these new liquid alts will be based on proven strategies run by experienced portfolio managers, others “may be watered-down hedge funds and the performance likely won’t be there,” he says. “And so, the screening becomes very important.”

Yet, critics of the regulatory framework argue that if education is so critical in being able to offer liquid alts to clients, then why have MFDA-licensed advisors long been able to offer high-net-worth clients hedge funds sold through an offering memorandum?

John Waldron, founder of Learnedly, an online subscription-based training platform for advisors, says that “it’s a real head-scratcher why this is the case” – especially because hedge funds often contain riskier assets than liquid alts.

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Mr. Waldron adds that he understands why regulators would require additional education for the 80,000-plus MFDA-licensed advisors in Canada to offer liquid alts, but the required courses are “likely overkill.”

He notes that the MFDA used the right approach with the proficiency requirements it introduced in 2017 for advisors to sell exchange-traded funds “in so far as saying, ‘Look, more training is needed,’ so they created a very specific curriculum outline that describes exactly what additional training [MFDA-licensed advisors] need.”

That’s an achievable and reasonable requirement for advisors because they’re not forced “to spend thousands of dollars on an entirely new licensing course,” he says.

Even if advisors do complete the extra requirements now, their dealer firms also have new compliance criteria to meet so their advisors can offer these products. Specifically, Mr. Latimer notes that a mutual fund dealer’s chief compliance officer must either have a CFA or have completed the derivatives fundamentals course.

“The strategies that liquid alts offer have been used by institutional investors and other large-scale conservative investors to hedge risk for decades,” he says. “So, why shouldn’t everyday Canadians have access to these without the additional hurdle of further educational requirements for advisors and chief compliance officers?”

Given that liquid alts are the middle ground between long-only mutual funds and hedge funds, the current educational framework doesn’t seem to fit, Mr. Latimer adds.

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Although he expects some advisors to go forward with the education, it’s likely many will choose not to because of the challenges involved in taking the required courses.

Meanwhile, the MFDA has been circumspect thus far regarding possible changes to the educational requirements for mutual fund advisors to sell liquid alts. In response to inquiries from The Globe and Mail, the self-regulatory organization states: “We are considering whether the current proficiency requirements continue to be appropriate for the sale of [liquid alts] by MFDA members and their advisors.”

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