After a year that featured the spectacular crash of Portus Alternative Asset Management Inc. and several other high-profile providers, a growing number of distributors are “tightening the screws” on the screening processes used to evaluate new products and determine whether they belong on their advisors’ product shelves.

“We want to vet everything that is being put in front of our advisors as much as we can so we can detect flaws or potential risks or problems associated with the product or the family,” says Joe Canavan, CEO of Toronto-based Assante Corp.

He says his screen team looks at a variety of factors before making its decision, including evaluating the sustainability of both the company and the product it’s promoting. But Canavan says he doesn’t expect the screening process to be perfect.

“There are so many products and companies out there, you owe it to your advisors and you owe it to your clients to have these processes and to put really smart people on them, so it’s one form of defence against a blow up. Things are going to get through and you’ll miss some things, but you at least have to give it a great shot,” he says. “This is a way for us to protect our major constituents from disaster as much as we can.”

Charlie Spiring, CEO of Winnipeg-based Wellington West Capital Inc., says its product review committee has been amended to have both a compliance and capital markets “lens.”

“In the past, there were too many sales lenses. Now it’s critical to have people who see the world from different places,” he says, adding that, prior to the Portus meltdown, Wellington West’s product review committee was focused on “the next best thing.

“Now it examines what [the product] is. Does it have sustainability, is it great for our clients and is it cost-efficient?” he says.

He notes that its product review committee looks at the managers’ experience and their past histories, but not “how long they’ve been at their new homes.

“It’s counter intuitive,” he says. “Some of the smaller funds have quite often outperformed the big funds. So, you often want to bet on the ones that can move out of the market faster. We evaluate them by their peers; you can’t always compare apples to apples.”

Spiring is quick to note Wellington West’s guidelines are written “in pencil,” adding that “writing them in stone leaves you open for second-guessing. We’re going to continue reinventing out guidelines.”

Arguably, the highest-profile example of increased vigilance was the Berkshire Group, which told its 900 advisors across the country this fall that they aren’t to deal with any company or product that has not been around for at least five years and does not have at least $200 million in assets.

Michael Lee-Chin, chairman and majority shareholder of the Burlington, Ont.-based company as well as CEO of its sister firm, mutual fund manufacturer AIC Ltd., says its hard-line stance was prompted by the negative fallout surrounding Portus, the scandal-plagued Toronto-based hedge fund company that was placed into receivership by an Ontario court last spring.

The Ontario Securities Commission alleges Boaz Manor, Portus’s co-founder who has eluded authorities by fleeing to Israel, was the brains behind a massive scam.

Before the regulators began closing in, advisors at a number of firms, including Berkshire, had referred clients to Portus.

“When Portus was being written about, it was my name that was dragged into it, not this fellow [Manor] who took off,” says Lee-Chin.

“What do I have to do with Portus? I’m busy at AIC. But I was dragged into it so we’re not about to take any risks with anybody.”

Manulife Financial Corp. is taking the same approach. Tom Nunn, assistant vice-president of media relations at the Waterloo-based firm — which was widely criticized earlier this year for being the biggest source of referrals for Portus — says it has reviewed its entire approval process of any product that might makes its way onto the firm’s shelves.

“We’ve taken this one very seriously,” he says. “The Portus case highlights the need for a complete review of all elements of any product [including] any third party referral product to establish track records, credibility of the individuals involved, a full range of elements,” he says.

Nunn says Manulife has reviewed its entire due-diligence process on all referral products. “That, in itself, was quite a process. We’re moving forward and ensuring any new referral is reviewed at all levels.”

@page_break@Dan Hallett, a Windsor-based analyst with Dan Hallett and associates Inc., says it’s not surprising that dealers are tightening their rules regarding what their advisors can or cannot sell.

He says it’s not uncommon for larger dealers to require a product sponsor to have at least $500 million in assets under management prior to signing a distribution agreement.

There are two reasons for this, he notes. First, such size indicates economic viability; and second, it ensures a company has a certain level of capacity to handle the flow of client money into its products.

But he’s not convinced there shouldn’t be a little wiggle room. For instance, he notes that if Berkshire’s new criteria was applied in 1999, it wouldn’t have been able to sell products of Aderes Portfolio Management Ltd., a separate company that was also owned by Berkshire. (Its funds were subsequently merged into AIC.)

The new reality for smaller companies, Hallett says, is that they’re just going to have to tough it out until they reach the size required by different distributors.

“If you have less than X dollars in assets or a [short] operating history, you’re going to be out of luck with certain dealers,” he says.

Hugh Goldie, a governance consultant and director of consulting for The Exchange Group, a Winnipeg-based financial solutions firm, says from a governance point of view, any firm that decides to keep another’s products off its shelves is completely within its rights.

“That’s a perfectly legitimate decision for a board to make. It has a right to protect the assets of the clients so long as the firm uses a good process and respects the fiduciary duties and duty of care that is required of it.

“It’s its responsibility to protect the company and shareholder value,” he says. IE