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National Bank swallows Altamira
Acquisition signals Canadians' preference for advice

Less than two weeks ago, a long-rumoured acquisition in the mutual fund industry materialized. National Bank of Canada purchased no-load direct fund marketer Altamira Investor Services. While this deal was no surprise to most industry observers, it's a sober reminder of the preference that Canadian investors have for professional advice.

Canadian fund industry

There is a saying in the domestic mutual fund industry - "mutual funds are sold, not bought". Since most Canadian financial advisors are compensated via commissions resulting from selling products, the saying implies that Canadians prefer to get advice on what to buy rather than going it alone. I would agree with this statement since even many of those that are making their own decisions are only doing so because they can't find an advisor with whom they feel completely comfortable.

Distribution, distribution, distribution

Q: What are the three most important things in real estate?
A: Location, location, location.

Distribution is to financial services what location is to real estate - it's absolutely critical. Just like Ford Motor Co. has many dealerships that sell its vehicles, financial services firms have channels through which its products and/or services are sold. Canada's largest banks have their own exclusive distribution channel - bank branches.

The Canadian fund industry, however, has relied on what is called the "broker/dealer" network. Brokers are stock brokerage firms, the largest of which are owned by banks. Dealers include firms like my employer, Sterling Mutuals Inc., and other firms that deal only in mutual funds, not stocks and bonds.

Altamira was perhaps the most successful of direct sellers in the Canadian fund industry. When the industry was still in its infancy, with room to grow by leaps and bounds, it was easier to succeed. Now that the industry's growth has matured and that so many firms have been established to compete against each other, direct sellers face a huge hurdle.

A company that relies solely on advertising and good performance to attract investors' attention, and money, is fighting a losing battle against firms that are ready to pay financial advisors a commission every time they invest client money with the firm.

It's a simple issue of economics.

Direct sellers - an endangered species

One need only look back a few years to see that the direct selling no load mutual fund company is facing extinction. Remember Bissett Investment Management - the Calgary-based money manager who once sold only true no load funds? Franklin Templeton purchased them back in 1998.

Many die-hard do-it-yourself investors remember fondly the year 1995 - when Scudder launched a no load family in Canada. It planned to take Canada by storm by offering a solid line-up of mutual funds with low fees. It was so determined, it picked up all of the fees for all of its funds for a full year - then subsidized them heavily for years thereafter. That is, until they were purchased by Maxxum funds; now part of the Mackenzie family of funds. Scudder's history is documented in more detail in this older article.

This all translates into a shrinking universe of true no load funds, which are most attractive to thrifty do-it-yourself investors. It's quite clear that fund companies simply can't survive in this environment without a strong distribution channel. Selling direct is a much tougher game than it used to be in Canada.

Interestingly, this is in sharp contrast to the more mature and much bigger U.S. market - where investors love to jump into the driver's seat of their retirement savings.

A look into the future

Expect this trend to continue. I'm not just talking about the trend of companies gobbling up each other (which is typical as industries mature and become more competitive). More importantly, I'm speaking of firms striking one of various alliances - be it a merger, joint venture, or strategic alliance - to take advantage of each other's distribution.

What National Bank has done, with its purchase of Altamira, is open up a large and completely new distribution network (its branches) that was previously unavailable to Altamira.

If you're a devout do-it-yourselfer, don't worry. You still have many quality no load fund companies from which to choose. ABC Funds, GBC, Mawer, McLean Budden, Perigee, PH&N, Saxon, and Sceptre are great independent firms who remain happy to sell you their funds without any sales charges.

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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