NEO Exchange launches program to give mutual fund advisers access to sell ETFs to clients

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Mutual fund advisers will be able to more easily access exchange-traded funds for their clients as the NEO Exchange moves to provide real-time market data on virtually all Canadian-listed ETFs to the mutual fund community.

Fred Lum/the Globe and Mail

After six years of hurdles, mutual fund advisers will be able to more easily access exchange-traded funds for their clients as the NEO Exchange moves to provide real-time market data on virtually all Canadian-listed ETFs to the mutual fund community.

Despite being allowed to trade in exchange-traded funds under securities legislation, mutual fund advisers have been largely cut off from participating in the rapidly growing Canadian ETF market because of a lack of access to trade on a securities exchange.

Unlike an investment dealer licensed to trade securities, the majority of mutual fund firms have been at a disadvantage in adopting ETFs as they do not have the back-office capability to access an exchange to buy and sell securities.

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As well, mutual fund firms do not have easy access to real-time market data for ETFs as, traditionally, the products they sell do not require an exchange and are priced at the end of each day after the market closes.

Now, after six years of advocacy from the Canadian ETF Association (CETFA), the Mutual Fund Dealers Association (MFDA) and several other industry groups, some mutual fund dealers are beginning to expand their product shelf to include ETFs with the help of data provided by the NEO.

“There is a great need from the industry to access data that is also cost-efficient for those using it,” NEO chief executive Jos Schmitt said in an interview.

“It is critical for every adviser in Canada, whether part of the [Investment Industry Regulatory Organization of Canada] or the MFDA community, to have access to real-time market data in order to properly service their clients and enable sound and informed investment decisions,” he said. “Using stale data prevents an optimal outcome for the investor – plain and simple.”

Over the past several years, Canadian ETF assets have climbed, hitting more than $276-billion, as of May 31, up from $130-billion in 2017.

But the growth could be exponentially larger with the addition of mutual fund advisers selling the products, said Pat Dunwoody, executive director of CETFA.

There are approximately 81,000 mutual fund advisers within 90 mutual fund dealers in Canada, but getting them access to a securities exchange has been a slow-moving project for the industry.

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“It’s taken years longer than we had hoped but we are finally seeing that window open for advisers to offer retail investors a product that may be more suitable – and affordable – in their investment portfolios,” Ms. Dunwoody said.

Mutual find clients hoping to invest in ETFs by themselves would have to open an online brokerage account and incur trading costs.

In 2015, CETFA started a working group and launched a partnership with custody and trade execution provider National Bank Correspondent Network (now National Bank Independent Network), which offered to provide access to ETFs for MFDA firms, but with a hefty price tag. Two years later, Toronto-based fintech start-up Vexo Technology Solutions Corp. launched trading software ETFbahn, but it did not include real-time pricing.

By using NEO’s data for Canadian-listed ETFs, two mutual fund dealers, IG Wealth Management and Sterling Mutuals, have been transforming their platforms to integrate ETF sales into their business model. Both companies have been piloting ETF platforms that incorporate NEO data since earlier this year.

With 3,300 mutual fund advisers, IG Wealth Management is one of the country’s largest mutual fund dealers. Over the past year, the company started to shift its investment strategy to include ETF access for its advisers. After moving all its client accounts onto a new back office system, the company began training 2,300 advisers who wanted access to trade in ETFs.

“When we look at ETFs, they are taking a bigger piece of the marketplace, especially with investments made by institutions and retail investors, and we wanted to makes sure our clients had access to that growth,” Brent Allen, senior vice-president of financial services distribution at IG Wealth, said in an interview. “Products change over time and we need to make sure we are embracing that change.”

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Last month, Sterling Mutuals launched a new back-office system to trade ETFs – a program that took several years to build through a partnership with software services provider OneBoss. Sterling CEO Nelson Cheng says he plans to make the software available to other small- to mid-sized dealers who want to shift into the ETF market.

“There was never a mechanism that allowed us to have minute-by-minute information and level the playing field for all advisers who are selling these products,” Mr. Cheng said.

“Accurate and timely pricing leads to more efficient markets.”

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