Dual platforms the way of the future

The trend is being driven by a number of factors, says Ian Rus-sell, president and CEO of the Investment Industry Association of Canada. For starters, he says, the costs of operating an MFDA-only dealer are on the rise. As a result, firms are either consolidating or disbanding entirely. More significant, however, advisors are beginning to recognize the importance of broadening their service and product offering.

“In many cases, moving to the IDA world leads to a much more efficient financial planning business,” Russell says. “Clients have become much more sophisticated, and this is the most cost-effective and efficient way of serving them directly.”

That’s not to say that migration is without obstacles. Incorporated advisors wishing to migrate to an IDA platform must abandon their incorporated status because it’s not allowed by securities regulators. On the firms’ part, operating dual platforms is costly; and merging the two would require all advisors to obtain a securities licence, even if they wish to sell only mutual funds.

Still, dealers that have chosen to take the dual-platform route aren’t looking back. Take, for instance, Dundee Wealth Management Inc. , the Toronto-based firm whose securities platform is comparable to independent brokerages such as Raymond James Ltd.

Currently, 550 of the firm’s 1,800 advisors operate through Dundee Securities Corp. , the IDA arm that accounts for $17 billion in assets under management — half of Dundee Wealth’s total AUM. With Dundee Securities’ full-service corporate finance and underwriting capabilities, a full-service bond desk and a self-clearing back office — in addition to a complete MFDA offering through Dundee Private Services Inc. — Dundee Wealth calls its offering “robust.”

Again, it all comes down to choice. “If advisors want to operate on an MFDA platform, they can. And if they want to operate on an IDA platform, we have all the tools and resources and technology to make it happen,” says Dan Brintnell, executive vice president and co-head of Dundee Wealth’s retail division. “But it’s absolutely the advisors’ choice as to how they want to operate their business. Migration is their choice.”

It’s a similar story at Burlington, Ont.-based Berkshire-TWC Financial Group Inc. It added an IDA-member firm to its offering when it created Berkshire Securities Inc. in early 2000. Since then, the investment dealer has grown to serve 370 advisors and manage $8 billion in AUM — more than two-thirds of Berkshire-TWC’s total AUM.

Glenn Pittman, Berkshire-TWC’s senior vice president of business development and marketing, says a steady stream of advisors have migrated from the firm’s MFDA platform, Berkshire Investment Group Inc. , to the IDA platform in recent years. Client need is driving much of the movement.

“Our advisors say to us, ‘Look, I have clients with certain needs that can’t be fulfilled on the MFDA platform’,” Pittman says. “So, that’s one of the reasons we were so proactive about this early on.”

Still, there are no plans to disband the firm’s mutual fund platform any time soon. “We encourage advisors to migrate to the IDA side, but we certainly don’t force anyone to abandon the MFDA platform,” he says. “There are people who obviously want to stay where they are, and we fully support that.”

Even Investors Group is changing its tune. In July, the MFDA-only firm will roll out a variation of its platform that will allow licensed advisors to sell securities. Currently, advisors who wish to offer their clients securities must work with a specialist to make the sale. But the new offering doesn’t mean the firm will become rife with traders any time soon.

@page_break@”Our advisors don’t want to become indi-vidual stock- or bond-oriented,” says Kevin Re-gan, Investors Group’s executive vice president of financial services. “They’re very comfortable in managed asset products, mutual funds, insurance — the whole thread.”

Regan says “relatively few” of the firm’s 3,900 advisors are interested in making the transition to an IDA platform. Of those surveyed this year for Investment Executive‘s Planners’ Report Card, many said they had no intentions of making the switch.

Likewise, regional fund dealer Portfolio Strategies is eyeing the securities platform. It recently submitted its application to the IDA to create an investment dealer to be known as Portfolio Strategies Securities Inc. President Mark Kent says the original plan was to move the entire firm to the IDA platform, but now he intends to keep the MFDA model intact and run the new securities dealer alongside.

Cost is an issue, Kent says. In the MFDA world, most advisors offer no-charge client-name RRSPs; in the IDA world, RRSPs have to be self-directed and incur an annual fee (unless the advisor chooses to absorb the fee himself). Switching fees are another drawback. Most IDA firms charge between $10 and $47 for switches within the same fund family, depending on the back-office system they use; on the MFDA platform, the switch is free.

“So, right away, that eliminates a lot of advisors who don’t want to start imposing fees on their client base,” Kent explains.

Kent isn’t expecting the firm’s 295 advisors to move en masse to the securities platform right away; in fact, he says, he would be surprised if even 10% of them made the transition within the first year. Given the educational requirements to operate on an IDA platform — advisors must take the Canadian securities course and complete the Conduct and Practices Handbook exam — along with the additional trustee fees, Kent concedes that it’s entirely possible that only 20% of the firm’s advisor base will move to the securities platform over time. To build the investment dealer, Kent will have to lure advisors from existing IDA-member firms.

The fact that regulators don’t allow limited market registration is another roadblock for firms wishing to make the leap to an IDA platform, Russell says. The stipulation means that all advisors are required to obtain their securities licence within nine months of joining an IDA-member firm, even if they have no intentions of selling securities.

“There is no regulatory reason an IDA membership should impede a specialized salesperson in an IDA-member firm,” Russell says. “You’re still selling specialized product, you’re meeting the proficiency requirements for it, and you’re on an IDA platform in which the compliance processes are as good, if not better. So, what’s the problem? Right now, the rules don’t permit it.”

But not every mutual fund dealer is eager to jump on the securities bandwagon just yet. Merlin Chouinard, the president and chief compliance officer at Saskatoon-based Sentinel Financial Man-agement Corp. , estimates that moving to an IDA platform would cost his company $500,000, not including the additional expenses of hiring more qualified employees.

What’s more, few of the firm’s 47 advisors are interested in selling securities. The problem, Chouinard says, is that advisors are already so put off by stringent MFDA regulations that any additional red tape is seen as a major obstacle.

And some Sentinel advisors are content to stay where they are. Says one company advisor: “It’s not for everyone.” IE