Hurdles remain for mutual fund-licensed advisors who want to sell ETFs – The Globe and Mail

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A software solution could easily allow mutual fund advisors to sell ETFs, but implementing such a system involves time, effort and money, which is a major stumbling block for smaller mutual fund dealers and their advisors, says Nelson Cheng, chief executive officer of Windsor, Ont.-based Sterling Mutuals Inc.

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There has been much confusion in the financial services industry about whether financial advisors who are licensed to sell mutual funds are allowed to offer exchange-traded funds (ETFs) to their clients as well.

The reality is that they are – and they have been able to do so for a long time, says Pat Dunwoody, executive director of the Canadian ETF Association (CETFA), because ETFs meet the definition of a mutual fund in the Canadian Securities Administrators’ National Instrument 81-102 regulations.

Yet, few advisors who run their business through a mutual fund dealer licensed by the Mutual Fund Dealers Association of Canada (MFDA) have actually done so because most have lacked the necessary access to an investment dealer licensed by the Investment Industry Regulatory Organization of Canada (IIROC), which has the back-office capability to buy and sell securities – such as stocks and ETFs – on an equities exchange, she adds.

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Efforts to develop a workable solution have continued for several years. Many in the industry anticipated one was around the corner. In anticipation of such a rule, the MFDA issued a bulletin in 2017 requiring advisors to take a proficiency course to trade ETFs for clients because, under the rules, MFDA-licensed advisors must have the necessary training, knowledge and experience to trade these products competently. (Several provincial securities commissions approved the proficiency standard that same year.)

“There was a concern that some of the MFDA-licensed advisors would jump into [ETFs] knowing nothing about the product,” Ms. Dunwoody says.

Still, even though it’s been about two years since the proficiency standard was introduced and subsequently approved, few if any firms have MFDA-licensed advisors trading ETFs, says Sandra Kegie, an industry consultant and policy advisor with the Federation of Mutual Fund Dealers.

“It’s odd,” she says about the slow movement among MFDA member dealers to facilitate ETF trading for the approximately 82,000 advisors managing about $550-billion in assets at their institutions. “The educational aspect of this should not be a barrier to entry.”

And in reality it’s not. Rather, Ms. Kegie says, “the big barrier is with the [mutual fund] dealers” that provide the necessary clearing infrastructure for advisors to sell certain products. Currently, their platforms are set up to interface with Fundserv Inc., the clearing house for mutual fund trades. As such, these systems are not designed to connect to stock exchanges, or IIROC dealers that can execute trades.

Nelson Cheng, chief executive officer of Windsor, Ont.-based Sterling Mutuals Inc., says a software solution could easily solve the problem. The issue is that implementing such a system involves time, effort and money, which is a major stumbling block for smaller mutual fund dealers and their advisors.

“Software vendors aren’t going to build on speculation,” says Mr. Cheng. “They’ll need a customer to step up and spend a few million dollars to do it.”

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Most small to mid-sized mutual fund dealers are reluctant to make a large investment, especially when they have alternatives – including ETFs inside a mutual fund wrapper.

“The fact is fund companies have also recognized a lot of dealers are not going to be selling ETFs directly, so they’ve come out with [mutual] funds of ETFs,” Mr. Cheng says.

Meanwhile, some of the larger financial services firms – such as the big banks – are not motivated to allow MFDA-licensed advisors to sell ETFs directly.

“I don’t see the banks doing that anytime soon,” Ms. Dunwoody says, adding that as these institutions also have IIROC-licensed subsidiaries, “the message to advisors is that if they want to sell [ETFs they should] become … IIROC[-licensed].”

“If you’re a bank, why would you want your mutual fund branch[-based advisors] to sell ETFs?” adds Fotios Saratsiotis, co-founder and former president of Toronto-based fintech startup Vexo Technology Solutions Corp., who still works for the organization as a consultant. “If your [advisors are] selling proprietary product, for example, and making a killing … then why would you shoot yourself in the foot?”

Vexo aims to help independent mutual fund dealers and their advisors gain access to the necessary trading platform to sell ETFs with its software solution, ETFbahn.

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Although Vexo has had early success, including establishing partnerships with Credit Suisse Securities Canada Inc. to gain access to its execution services, and robo-advisor Justwealth Financial Inc. to gain greater distribution, Ms. Dunwoody says it still has yet to make that first real-world trade that would overcome the inertia regulators and the industry have regarding giving their seal of approval to mutual fund advisors selling ETFs.

What’s more, dealers also want their platforms and tools to do more than just process trades, Mr. Saratsiotis says. “Many of the firms out there are saying, ‘We need a lot more things … like digital on-boarding of new clients … and automated and customizable portfolios.’ ”

As a result, some dealers are developing in-house solutions, including Sterling Mutuals. Mr. Cheng admits his company is rather unique given that he is also a software developer with a personal interest in upgrading Sterling’s trading platform, OneBoss.

“This is something I wanted to do,” he says.

Still, Mr. Cheng is not certain whether the upgrade will generate more business.

“There are lots of mutual funds out there now that are competitively priced,” he says, “so, as an advisor, do you even really need to sell ETFs?”

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But for those MFDA-licensed advisors who want to, Ms. Dunwoody hopes they will have the capabilities to do so very soon.

“I’m feeling much better this year that it might happen because everything is in place,” she says.