It's good to have options, but advisors are adopting new strategies to monitor and evaluate investment products.Alison Calazans/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.
Investment fund companies release a firehose of new investment products every year – from duplicates of existing products with minor tweaks, to copycats of competitors’ offerings, to wholesale new ideas. It can feel like a full-time job for advisors to keep up and compare new offerings against what’s already on their product shelves.
The number of regular-class exchange-traded funds (ETFs) on the market more than quadrupled in the past decade, to 1,339 in 2023 from 299 in 2013, according to the Canadian ETF Association. And there were 3,384 mutual funds in Canada at the end of 2023, according to the Investment Funds Institute of Canada. (Although 160 mutual funds were launched last year, there was a net decrease of 24 as companies streamlined their offerings.)
“It feels like an arms race,” says Darren Coleman, senior portfolio manager at Coleman Wealth with Raymond James Ltd. in Oakville, Ont. “‘That company launched a product, we have to have a matching one.’ As the advisor, my response is, ‘Okay that’s an interesting idea – now I have 11 of them to review.’”
The client-focused reforms that took effect in late 2021 strengthened know-your-product (KYP) obligations, which require advisors to understand the structure, features, risks and costs of the products they sell or recommend to clients.
While it isn’t practical to review every new product, An-Lap Vo-Dignard, senior wealth advisor and portfolio manager with Vo-Dignard Provost Family Wealth Management at National Bank Financial Wealth Management in Montreal, says advisors need to do enough research not just to tell clients about the products they want to use “but also products we don’t want to use [and] know how to explain it to the client.”
Familiarity matters
To manage the deluge, some advisors say they prioritize reviewing new products from preferred fund companies with whom they already have relationships.
“We all have our favourites that we’ve used over the years, and it’s normally based on [not] wanting these new products coming to market that run the risk of getting delisted,” says Stefanie Keller, certified financial planner and chief executive officer of Stellar Wealth and Tax Solutions in Winnipeg.
Mr. Vo-Dignard notes that working frequently with the same providers gives advisors better service and access to money managers who can explain new products in greater depth.
Paul Shelestowsky, senior wealth advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont., says he has a “pretty tight watch list” of products from about five trusted investment fund companies.
He said Aviso Wealth Inc.’s KYP comparison tool is helpful (Meridian offers funds and other securities through Aviso), but he prefers using Morningstar Canada’s research to compare new funds against their peers and track his product shelf because it’s an unbiased third party and a recognizable name to clients. He says he sticks with funds with five-star ratings that are beating at least 90 per cent of their peers.
Mr. Shelestowsky also reviews fund companies’ lists of top ideas for the coming year, although he hopes his clients are already in them. “The top 10 ideas usually don’t change drastically year in and year out.”
Most investors are wary of putting their money in a product with no history and want to see at least three years of data to understand the risks and costs, he says. Some fund companies do backtesting to project how the fund would have performed over the previous five years, which Mr. Shelestowsky says is helpful but has to be taken with a grain of salt.
Mr. Coleman says he applies the one-in, one-out rule when evaluating new offerings to keep his product shelf tidy and ensure any new products fit with the overall strategies of his model portfolios.
“If I’m going to add that, what comes out? And is it better than the thing I’m taking out? That provides at least a beginning to evaluate properly – that discipline,” he says. “Don’t throw it in just for the sake of it.”
Hiring additional help
Mr. Coleman’s practice also hired a portfolio analyst to remain open to promising ideas and product innovation from firms outside his preferred fund companies. The analyst reviews research put out by Raymond James and external firms to evaluate new funds and ETFs. When considering individual securities, they’ll talk to companies’ management teams and read analyst reports.
Mr. Vo-Dignard’s team also hired three analysts to look into ideas the advisors are interested in and assess new products from mutual fund and ETF companies.
For advisors with fewer resources, Mr. Coleman says one option can be to narrow their focus to products and manufacturers their firms have reviewed.
New complexity
The growth in new alternative asset options for retail investors has added an additional layer of complexity for advisors. Mr. Coleman says he believes most advisors “deeply underestimate” the amount of due diligence necessary on these products. Advisors need to understand not only the strategy and any risks to that approach, but also the manager’s background and experience, and how money flows in and out of the product.
“The learning curve is very steep,” he says, but notes the alternatives industry is relatively small in Canada and most managers are open and willing to share information.
For more from Globe Advisor, visit our homepage.