A unique program offered by Crystal Wealth Management System Ltd. can help entrepreneurial financial advisors design and brand their own mutual funds for use as a core holding in their clients’ portfolios.

The Blueprint program offers advisors a hand in constructing funds that may hold a broad range of investment products designed to meet specific objectives, including individual stocks and bonds, exchange-traded funds, hedge funds and managed futures or other derivatives. Such funds could also include mutual funds sold by other fund management companies.

“The advisor develops his or her own brand, not that of a third-party manufacturer,” says Scott Whale, chief operating officer of Burlington, Ont.-based Crystal Wealth. “The advisor determines the asset allocation, rebalancing strategy and investment mix.”

Although many advisory firms have proprietary products such as wrap programs, the concept of an advisor actually creating his or her own individually branded mutual fund was hatched by Marc Hamel and Steve Geraedts, senior investment advisors with yourCFO Advisory Group Inc. , an investment dealer in Burlington. In 2003 they formed a company called Advisor Asset Management Group Inc. as a vehicle to promote the Blueprint concept and act as sponsor for any funds created under the program.

In 2004, with the help of Crystal Wealth as investment manager, the pair created their first fund — OneFund Diversified Plus. It is a global balanced fund that has since become a core holding for their clients. The fund has $17 million in assets and an average annual return since inception of 5.3%. It is listed on Fundserv Inc. and is available to any investor, not just clients of Hamel and Geraedts.

Since OneFund was formed, the Blueprint concept has been applied by three additional advisors working for separate firms.

ESI Wealth Management Inc. of Markham, Ont. has created ESI Managed Portfolio, and Oakstreet Investment Management Inc. of Nanaimo, B.C., has created Oak Street Income Fund; both funds invest in Canadian balanced portfolios.

In addition, Peer Financial Ltd. of Calgary has created Peer Diversified Mortgage Fund, a yield fund investing in non-conventional mortgages that typically don’t meet the normal lending criteria of banks.

“As financial advisors, we could see a way to meet the needs of other advisors, and decided to share the program with others,” says Hamel. “If it made sense for us, it could make sense to offer the framework to advisors across the country. Every new fund creates economies of scale overall, and lowers the costs for the individual funds.”

Dan Richards, president of consulting firm Strategic Imperatives Ltd. in Toronto, says advisors having a stronger hand in portfolio management is a trend evolving in various forms, with some advisors even acquiring their investment counselling credentials and directly managing investment pools.

“It’s a point of differentiation in a competitive world,” he says. “Some advisors have a talent for picking stocks and building portfolios. But advisors must ask themselves if they have the skill set required. Traditionally, successful advisors have been good at relationship building or product sales. It’s a rare advisor who has the talent and discipline to do all things well.”

For $25,000, Crystal Wealth takes care of all the set-up costs of the investment fund, including legal fees and a listing on Fundserv. Because the infrastructure is already in place, the cost is much less than the $250,000 or more it would normally cost to launch a fund from scratch, Whale says.

It takes six to eight weeks to get a new fund up and running through Blueprint, and ideally the fund will have assets of $10 million-$15 million within a year. Often a balanced fund can attract more assets than a niche or sector fund, says Whale. Ongoing costs such as administration, trustee, custodial and accounting fees are included in the annual management expense ratio of each individual fund, but all funds enjoy the efficiencies of shared back-office systems.

Funds launched through the Blueprint program are sold via an offering memorandum to sophisticated investors; there is a minimum investment threshold of $150,000, unless the fund is sold to investors who are defined as accredited under provincial regulations. In Ontario, for example, that means an investor must have annual income of $200,000 or investment assets of $1 million. If investors are accredited, the minimum investment in the funds is $5,000.

@page_break@The idea of creating a fund tends to work best for advisors who have a large stable of high net-worth clients, and those advisors should have a book of $40 million or more, says Whale. Such funds are likely to appeal to advisors who are confident, independent, ahead of the curve and entrepreneurial thinkers, he adds. Such advisors often run fee-based practices, and would also like the efficiencies and the control that having their own funds offers.

The downside is that the advisors must answer directly to clients if their fund underperforms.

“Blueprint offers a way for an advisor to stand above the crowd rather than relying on off-the-shelf products and being restricted to a client-service role,” Whale says.

Although “advisor partners” work closely with Crystal Wealth to establish an investment strategy, they are not the fund managers. Crystal Wealth acts as the manager and portfolio advisor for each of the Blueprint funds and manages the assets in accordance with the offering memorandum. Advisor Asset Management is named in the offering memorandum as the sponsor of each fund launched under the Blueprint program, and new funds become part of the Advisor Asset Management family.

Once a fund is up and running, advisor partners sit on the investment advisory committees of their respective funds. Like most funds, a Blueprint fund may pay trailer fees and commissions to advisors selling the funds — in these cases, primarily the advisor partners.

Disclosure to clients of the various fees and interrelationships is required, says Whale. (Richards says conflicts of interest may arise when advisors receive additional benefits from selling their own funds.)

Working with Crystal Wealth, advisors have the opportunity to select investment solutions that suit their clients. A tailor-made fund has more flexibility than regular funds or wrap programs, and may increase the value advisors bring to their clients, Geraedts says.

For example, during the market downturn of a few years ago, many advisors found that their high net-worth clients who had access to alternative strategies such as hedge funds weathered the storm in better shape than smaller clients who were unable to diversify as effectively. Advisors who design their own funds can assemble portfolios that include some alternative products, giving smaller clients (those with $200,000 or so to invest) access to the same kind of diversification as the multimillion-dollar clients who can easily access a broad mix of investments.

Clayton Smith, managing director of Crystal Wealth, says a customized fund portfolio also allows advisors to make the same change for everyone at the same time, if buying or selling a common holding, rather than dealing with some clients sooner than others and spending a lot of time making the same trade in every account.

“Everyone is treated equally,” he says. “There is not three months between the first client and the 300th client, and it doesn’t matter if you see the client once a month or once a year. The fund empowers advisors to build their business. Instead of focusing on a multitude of trades, they can concentrate on financial planning.”

Smith says the Blueprint concept usually works best when a fund is structured as a core holding for most clients but doesn’t represent 100% of anyone’s portfolio.

“We can create a portfolio that speaks to an advisor’s way of managing money,” Smith says. “Some clients may want to be more aggressive, and they can add on other investments such as small-cap funds or direct stock holdings, using the fund for only a portion of their assets. Other clients may want to be more conservative, in which case half their holdings might be in the fund and the rest in bonds.”

As each fund is managed by Crystal Wealth, it may hold investments that an advisor partner is not personally licensed to trade. For example, an advisor working for a mutual fund dealer may not have a licence to trade stocks and bonds, but these can be held in the mutual fund. The objectives of each fund are established at the outset and set out in the offering memorandum.

In adding more funds to the Blueprint family, Crystal Wealth looks for advisors who take a prudent approach to money management. It won’t set up a fund as a vehicle for risky ventures such as day trading. Crystal Wealth can back-test a hypothetical portfolio to determine how the various investments would have performed at different points in the investment cycle, or in relationship to one another.

Such custom-designed mutual funds make the most sense for advisors who work for small independent firms rather than big shops that have proprietary funds and wraps, Geraedts says. IE





Quality control



Darren Reid, president of Nanaimo-based Oakstreet Investment Management Inc., is a fee-based advisor with a lot of retired clients looking for steady income and capital preservation.

A year ago, he decided to create Oakstreet Income Fund to provide a tailor-made solution to meet his clients’ needs. Managed by Crystal Wealth Management System Ltd. of Burlington, Ont., the fund holds a mix of blue-chip dividend-paying stocks, closed-end trusts and treasury bills, and has had a return since inception of 7.4%.

“It’s an issue of quality control more than anything else,” he says of the decision to create his own branded fund. “As a member of the fund’s investment committee, I’m that much closer to knowing exactly what the portfolio manager is doing.”

Reid says his clients have responded positively to the fund. It helps that there was already a bond of trust established on the financial planning side. He is starting by putting a small percentage of each client’s assets in the fund, and then building from there. With time, the fund will account for a higher percentage of clients’ assets.

“It’s not ‘zip, boom.’ But my clients like the idea, and I’ve had referrals outside my client base,” he says.

Reid acknowledges that, as an architect of the fund, he would personally have to answer for any reversal in the fund’s fortunes. But he believes advisors should always be “held responsible” for their clients’ portfolio performance, as they’re being paid to add value.

— Jade Hemeon