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The wrap account to avoid
Optima Strategy is in a dubious group

In my March 2, 2001 article I introduced the concept of wrap programs and gave an overview of the costs and benefits. In case you missed it, I make no secret about my dislike for these hot-selling products. I won't get into the details again, but I do want to focus your attention more closely on Assante Corporation's Optima Strategy pooled wrap program.

Optima Strategy is one of the country's larger wrap programs and it has the dubious honour of being the most expensive pooled wrap in the country. However, that's just one of the reasons why investors shouldn't leap blindly into this product.

High fees

For years, Assante's Optima Strategy pooled wrap program has been the most expensive product of its kind. While most programs have been charging in the 2.5 to three per cent range, Optima has consistently charged 0.5 to 1.3 per cent above its competitors. Problem is, in this case investors don't necessarily get what they pay for, in my opinion.

Two fee modifications over the past year or so haven't changed that situation. Just over a year ago, I completed my first in-depth analysis of wraps and estimated that Optima clients could have been paying as much 3.31 per cent annually for a balanced portfolio (defined as 25 per cent Canadian equity, 20 per cent US equity, 20 per cent international equity, 30 per cent bonds, and five per cent cash).

In my more recent report in February of this year, I found that fees for this same hypothetical balanced portfolio jumped to a maximum 3.47 per cent. Fees have changed again (see below).

Fee reduction - not

Optima Strategy amended its fees just two months ago, which was spun as a fee reduction. However, that's not quite how it transpired. After reviewing the new fee structure, it appears as if some Optima clients will see fees fall, while others will see a hike in fees.

Optima is the only wrap program of its kind, to my knowledge, that offers a deferred sales charge (DSC) option on its funds. (Recall that investing on a DSC basis means paying nothing directly up front, but you face an exit fee if you sell within seven years while your advisor gets a lump sum commission payment of four to five per cent of the amount invested for his/her advice.)

While selling funds on a DSC basis is still pretty common, I must say that it's quite unusual for portfolios as large as those targeted by this program ($100,000 and up). New fees for Optima Strategy are now estimated at 3.22 per cent annually for DSC investors, and 3.6 per cent for those investing on a front-end load basis (based on the balanced portfolio noted above).

Reasons for its dubious honour

As mentioned in my previous article, I think most wrap programs charge more than is warranted for their services. However, we've already seen that Optima Strategy is considerably more expensive than its peers. Why? A big part of the reason stems from the fact that a DSC option exists on their funds.

The up-front payouts to Assante financial advisors likely cost the company 0.6 per cent per year to finance out of the total Optima fees. That alone would bring their fees down to the higher end of wrap fees' normal range - but at least it would be in the range. If you have more than $750,000, you'll qualify for a fee reduction of 0.5 per cent.

While that's quite "admirable" of Assante, the fact is that most portfolios of that size require a much more customized solution than that available in any pooled wrap program. Further, larger portfolio sizes should benefit from lower management fees - not punished with higher fees.

The other reason: Optima charges investors extra for a fundamental service that all other wrap programs already include in their base fees. Remember that most wrap programs build portfolios and then monitor and rebalance them regularly. While Optima Strategy provides a similar service, it's optional and comes with added costs for Optima clients, ranging from an extra 0.65 per cent for DSC investors to one per cent per year for front-end load investors. Note: the all-inclusive fees mentioned throughout this article include this monitoring and rebalancing fee to make it more comparable to its peers.

A second level of potential conflicts

Many argue that financial advisors who are compensated on a commission basis have a potential conflict since they may be biased toward those products that pay the best commissions. In such a case, investment funds from great firms like Beutel Goodman, Mawer, Perigee, PH&N and exchange-traded funds (ETFs) have potential to be ignored, since they either pay substantially less in commissions or nothing at all. However, many of the financial advisors recommending Optima Strategy to their clients have a whole other level of potential conflicts - something that may be unknown to prospective clients.

Assante's business model has resulted in many of the company's financial advisors owning a relatively large number of Assante Corporation shares (TSE:LMS), which has sagged badly since its debut on the Toronto Stock Exchange in 1998. Many of the advisors recommending Assante's Optima Strategy program are also significant shareholders. This presents significantly more potential for conflict for Assante advisors.

From a corporate standpoint, Assante seeks to maximize profits. One of the biggest factors in its profitability is the growth of its proprietary (i.e. in-house) products, such as Optima Strategy. In Assante's prospectus for its public share offering in 1998, the following was observed:

  • Assante's financial advisors grew in number by 1,613 per cent from 1995 to 1998, while assets in its in-house products (primarily Optima) grew by 563 per cent.
  • Assante believed that to survive as a fund company (i.e. fund manufacturer), the key was to partner with established financial advisory firms with an extensive base of advisors and clients (i.e. a large distribution channel).
  • By growing assets in its proprietary products, there is the potential for a nine- to 16-fold increase in operating margins.
  • Assante's strategy is to partner with the owners of those firms and their advisors who are responsible for the client relationships and, ultimately, control of the "shelf space." Shelf space refers to ranking among financial advisors' preferred list of mutual fund companies they recommend to clients.

    To be fair, Assante isn't the only firm in this position, but they've been the most aggressive in their growth-by-acquisition strategy. Dundee and IPC are other similar firms in that they each have proprietary products and a network of advisors. However, Assante stands out in its apparent goal to use its growing advisor base to increase its in-house funds, most of which have fees that are far greater than their peers.

    It must be said that I know of no wrongdoing by this company or its advisors, and I'm not implying that I do. Frankly, its corporate goal of maximizing profits is great for shareholders, but it conflicts directly with the interests of most of its clients. There simply is no getting around that, but it's a reality of which investors need to be aware because it's a strongly growing trend in this industry.

    To disclose my potential conflict: on some level, Assante is one of my employer's competitors and advisors at Sterling cannot sell Optima Strategy. Though I always strive to deliver objective advice in all aspects, this fact should be known.

    As always, investors beware. Do your homework and don't be afraid to ask direct questions.

    Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at dha@danhallett.com
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