Bringing scale to the industry

As a result, he says, “they have shortchanged the investor.” He wants the media to talk about “the fact that fees have come down, very rapidly.”

Strickland would know: he joined the industry as a financial advisor at Montreal-based Nesbitt Thomson and Co. in the early 1980s, prior to its acquisition by Bank of Montreal in 1987. Back then, “the industry was much smaller,” he says, recalling his boss telling him to aspire to a $3-million book. “[There were] 400 advisors at Nesbitt.” Today, he says, Toronto-based BMO Nesbitt Burns Inc. has about 1,200 advisors; the ones surveyed for the 2019 Brokerage Report Card had an average book size of $213 million. Says Strickland: “Just in a generation, that scale has changed.”

Strickland talks to Investment Executive about how the mutual fund landscape has evolved throughout his career, as well as its challenges and opportunities.

Q Do your clients complain about fees?

A Never. I’ve been in this job more than 14 years. I’ve never once picked up the phone or had an email from a customer complaining about fees.

Q What are the key opportunities in the industry?

A Nobody dealt with advisors back in the mid-’80s. We were people that proper people stayed away from. That’s changed. And that’s a good thing. It’s brought a lot of scale to the industry.

When I got [to Fidelity in 2003], the size of the mutual fund industry was [about] $460 billion. People thought it was done. [It’s more than] tripled since then. So, the scale has just become a really good opportunity. And it’s why I think the industry has enabled fees to come down.

Q What is the role of ETFs as a lower-cost investing alternative?

A I’m still looking to discover that ETFs are cheaper for us to operate than mutual funds. It’s been an open question here for a good six or seven months. But it’s pretty obvious that there are some savings relative to mutual funds with ETFs, [as well as] additional costs. There are some things you need to do [with ETFs] that you didn’t need to do with mutual funds. There are market-makers involved and different transparencies. I think the outsider looks at [ETFs] as tremendously similar products. But they are not that similar from an operating point of view.

I think ETFs are a good place for passive investors. The structure does not work well for active [investment]. And, depending on which company you are, it will work better for some active managers than for us. But we don’t like people seeing our “buy” list. We have [about] 250 analysts around the world. We pay them a lot of money each, so we spend a lot of money on our buy list, every year. [And since it needs constant updating], you have to keep investing that money year after year. We don’t show our buy list to anyone, and in an ETF world, you have to show your buy list to a market-picker. So for us, the mutual fund is the better structure for active [investing].

When I grew up, there were passive and active. Now, there are active, passive and systematic, or quant, formulaic or algorithmic. And those [funds] are neat, because the price point is close to passive. We happen to think they are better products [than passive] and that they can be more customized to the needs of an individual.

This whole distinction between ETFs being cheap and mutual funds being expensive has been mischaracterized in the media for a long time: it’s really the distinction between the costs of passive and the costs of active.

I do see systematic attracting more money. [But] systematic, in a lot of categories, cannot replace active [fund management]. I don’t think anybody has created an algorithm that can go toe to toe with a Mark Schmehl or with a Geoff Stein. But in some portfolios that tend to be more “buy and hold,” maybe there’s an opportunity for systematic.

Q What are your thoughts on the increasing role of the big banks in this industry?

A It was a real leap of faith, back in the mid-’80s [when the banks began acquiring brokers], that these banks were going to take all their [existing] customers in savings accounts and GICs and expose them to the wealth-management industry. It didn’t seem logical. But here we are, 30 years later, and that’s exactly what’s happened.

A lot of good things happened. And the media has done some very good work in terms of educating investors. [With] the information flow back in the mid-’80s, you couldn’t learn to be an investor. There was no CNBC – it was just getting started. That was a real advancement. And the Internet has been great for investors. But I don’t think anything has added to the scale of the industry [as much as] the banks did, by getting involved in the wealth-management industry, and then introducing all of their customers. [Banks buying dealers] has been good for the investor.

Q Can you comment on the discussion involving deferred sales charges (DSCs)?

A The DSC is under a big microscope right now. I was in the industry the day the DSC came out. It changed everything. It democratized the mutual fund. Now there has been some abuse of the DSC structure. I’ve been a branch manager, a national sales manager and the president of a dealer. I’ve seen the bad stuff.

You should only use DSCs if you are sure you don’t need liquidity in the next six years. And guess what: large amounts of money, really old people and people using leverage, they can’t be sure of that. But [apart from these situations], the DSC was the second-greatest catalyst [to making investing available to more people].

Q Are you in favour of keeping DSCs?

A The people who make the case for it needing to go, the examples they use are people who use it in leveraged situations, people who are too old and people who use it with too much money. So, let’s regulate [such] that they can’t use it in those three situations, and let’s leave it for [others].

There are some new product structures that are fabulous. I didn’t have an RESP to sell when I was an advisor; what a wonderful thing that is to help families get their kids financially ready to go to school. We didn’t have TFSAs. They are fabulous. They are a straight, obvious thing for everybody to do. But the DSC was a real enabler of both of those structures. I think the best days of the RESP and the TFSA are still ahead of us. TFSAs are just now reaching critical mass, where a lot of people have a meaningful amount in them.

Q Are any changes needed with respect to mutual fund fees?

A Not really. I am a big fan of the two papers [the Canadian Securities Administrators] published in June 2018 – not all the elements in those papers, but in the main, they are good advances for the investor. They will cause a little bit of indigestion; not every dealer, not every manufacturer, is going to be treated equally. So, there is going to be a period of indigestion, but ultimately, the investor will be treated much better by the wealth-management industry as a result. And as a result of [that], the wealth-management industry will be much bigger and more successful.

I see all these changes in regulation as positive, if they are reasoned and well thought out. And the good thing about that last generation [of regulatory activity, including the past five years] is that all commissions got engaged in this thing. There was a lot of good study for four or five years, a lot of those papers have a lot of good stuff in them: they will really advance this industry, if and when they become regs.

Q What’s your advice for advisors?

A The advisor has a lot of masters. I’ve worked with a lot of advisors, in a lot of different capacities, for 30-odd years. To me, the advisors who are most successful for their investor clients and themselves are the ones who always put their investor clients first. Those are the ones who end up growing the biggest books [and] they don’t have any regulatory challenges. If you want to be an advisor for the next 30 years, you can’t do it without putting the investor’s interest first.

An unsung hero of the wealth-management industry is the branch manager. When there are great branch managers, very few things go wrong in the branch. Great branch managers have seen all those problems before [and] learned [from them]. But a great branch manager adds a great deal of value behind the scenes that most investors don’t [appreciate]. The only person in your corner is the branch manager. And the branch manager is going to mould you, and [you] want to be sure they mould you in the right way.