Roughly 75% of all financial advisors in Canada cannot sell ETFs. They fall under the jurisdiction of what’s known as the MFDA – Mutual Fund Dealers’ Association. They are pretty much limited to selling mutual funds, GICs, and Canada Savings Bonds.
The advisors who ARE allowed to sell ETFs fall under the jurisdiction of IIROC – Investment Industry Regulatory Organization of Canada (formerly the IDA). Most people recognize them as “stockbrokers”. They can sell pretty much everything.
So with the growth in popularity of ETFs, a lot of investors can’t get access to them. This is because these products trade on a stock exchange, hence the name ETF – Exchange-Traded Fund, and cannot be sold through 75% of Canadian financial advisors.
When you look at a comparison of mutual funds and ETFs, there are two big similarities:
- Both hold a portfolio of stocks, or bonds (excluding some of the sector specific ETFs which may have very few holdings).
- Both allow small investors to have a well diversified portfolio with small sums of money.
MFDA advisors are allowed to sell high beta mutual funds to their clients (high beta means the funds are more volatile than the index), so why can’t they sell a fund that has a beta of 1? (The index has a beta of 1, a portfolio with a beta higher than 1 is more volatile than the market, and a portfolio with a beta below 1 is less volatile than the index). Further, they are just as easy to do due diligence on since there is no manager – there is nothing complicated to know, and certainly they would be easier to keep on top of than an actively managed mutual fund.
Of course, the real problem is compensation. Most mutual funds are sold with embedded commissions in the MER – meaning that the funds pay an ongoing fee to the advisor. ETFs don’t do this (except for some Claymore ETFs).
So even if the MFDA could overcome the hurdle of being able to sell a product that trades like a stock, the firms still have to figure out how to compensate the advisors. Not all MFDA firms offer the “fee based” accounts – where a client advisory fee is charged separately from the product fees.
What do you think? Any ideas?