The push into the advisor channel by direct distributors of mutual funds is intensifying with the recent launch of new advisor-series funds by several fund companies.

This move reflects a strategy to penetrate a channel that, traditionally, has not been hospitable to no-load funds, says Earl Bederman, president of Toronto-based research firm Investor Economics Inc. Typically, no-load funds are sold by direct distributors to do-it-yourself investors without paying any commissions or trailer fees to advisors.

Among the companies that have recently introduced advi-sor-series funds are Toronto-based Saxon Financial Inc. and Scotia Securities Inc., and Vancouver-based Phillips Hager & North In-vestment Management Ltd. and McElvaine Investment Manage-ment Ltd. , the last a relative newcomer.

Scotia joins Toronto-based TD Asset Manage-ment Inc. and RBC Asset Management Inc. , which already offer advi-sor-series funds.

This move to penetrate the advisor channel is a marked departure from the banks’ traditional dominant position in the no-load marketplace.

“Every one is looking for growth,” says Bederman. “It’s a wide open playing field that allows them to move into each other’s space.”

The launch of these advi-sor-
se-ries funds is the result of by a “definite shift to advice,” says Philip Armstrong, CEO of Toronto-based Jovian Capital Corp. and founding partner of Altamira Investment Services Inc., formerly one of the premier direct distributors of mutual funds. (National Bank of Canada acquired Altamira in 2002.)

Fund companies recognize that “some people need advice and some don’t,” says Armstrong.

The shift by mutual fund inves-tors toward using advisors has become more pronounced in recent years, with surveys showing varying levels of advisor use among fund buyers, ranging from about 40% of inves-tors to more than 80%. For instance, a survey of 2,508 Canadian investors conducted in May and June of 2007 for the Investment Funds Institute of Canada showed that 83% of investors relied on advisors when purchasing mutual funds. In contrast, up until the mid-1990s, no-load mutual funds accounted for more than half of the total assets under management in the industry.

1% TRAILERS

Saxon’s new advi-sor-series funds include new small-cap funds — Saxon U.S. Small Cap, Saxon Global Small Cap and Saxon Microcap. These funds — in addition to the firm’s equity and balanced funds, including Saxon High Income Fund — pay a 1% annual trailer fee to advisors. Saxon’s advi-sor-series bond fund pays a trailer fee of 0.5%, while Saxon Money Market Fund is the only fund in the family to remain no-load and not pay a trailer.

The trailers are considerably higher than those paid on Saxon’s investor-series funds, which are designed for self-directed investors who do not require the services of a financial advisor. The investor series does pay a 25-basis-point trailer, mostly to the discount brokerages that serve self-directed clients. Saxon also offers F-series units for investors who purchase its funds through financial advisors offering fee-only accounts, as well as B-series units to certain high net-worth and institutional investors.

PH&N launched its B- and F-
se-ries funds in June 2007 and has now added eight new funds in these two classes. PH&N’s B-series (advisor-series) funds pay trailers of 50 bps on balanced, equity and dividend funds, 25 bps on bond funds and 10 bps on money market funds. The F-series funds are for advisors charging clients a fee. The company’s A-series funds, which pay no trailer fees, are distributed directly to investors.

PH&N’s trailer fees are substantially lower than those of Saxon, which is in keeping with PH&N’s philosophy of low fees. Chris Dotson, manager of corporate development and communications with PH&N, says that a lot of advi-sors have in the past sold the company’s funds even though they did not pay trailer fees. Arguably, the advi-sor-series funds are designed to enhance sales, which, Dotson says, have picked up appreciably.

The most recent family of funds to enter the advi-sor-series arena is that sponsored by Scotia, which launched 10 individual funds and four portfolio solutions in the series in early February.

DSC GETS LOW TRAILERS

The trailer or service fees paid to advisors by the Scotia funds vary by the load structure — front-end, deferred sales charge or low-load — used when the funds are sold. For funds distributed with a front-end sales charge, Scotia Money Market Fund pays a trailer of up to 25 bps; Canadian Income Fund, up to 50 bps; and all other funds, up to 100 bps; except Dividend Fund, which pays up to 110 bps.

@page_break@Scotia pays the lowest trailers in the field for the DSC option, ranging from up to 10 bps for its money market fund to 55 bps for Scotia Dividend Fund.

The trailer for Scotia low-load sales charge option is similar to that of the front-end option, with the exception of its money market fund, which pays 10 bps.

In January, McElvaine launched two advi-sor-series funds for its flagship fund, McElvaine Investment Trust. A-series units pay a trailer fee of 0.3%, combined with a 25% share of performance fees generated by the trust; F-series units are for advisors offering fee-based accounts. B-series are distributed directly by the company.

Commenting on advisor compensation for the A-series units, company president Tim McElvaine says: “I believe this structure aligns all of our interests with our clients’ interests. If we perform poorly, our investors pay lower fees. If we do well, then everyone benefits — including the financial advisor.”

A client’s decision to purchase advi-sor-series funds through an advisor comes at a price. “There is a higher embedded cost,” says Bederman, “which is associated with the cost of distribution.”

Fund companies pick up a portion of the cost of distribution, which is essentially the trailer fee.

For instance, for seven of Saxon’s 11 advi-sor-series funds, the management expense ratio is on average 42 bps higher than it is for its investor-series funds, and is slightly less than the 50-bps hike in trailer fees. In the case of PH&N, the difference in MERs between the advi-sor-series funds and the direct A-series funds is almost identical to the cost of the trailer fee.

However, not all no-load companies see moving into the advisor space as a viable option. Irwin Michael, president of Toronto-based I.A. Michael Invest-ment Counsel Ltd. and manager of the ABC family of no-load mutual funds, puts it best: “I do not want to dilute what I’ve worked so hard to build.”

At the end of the day, says Beder-man, “Brand, quality of product and performance” are among the key variables that drive sales. Based on these attributes, some traditional no-load funds have been able to penetrate the advisor channel by paying low or no trailer fees.

Now, they plan to boost their distribution by wooing the advisor channel with higher trailer fees. IE