Industry Spotlight -- The Wholesaler (Part 2)

Last blog post, we introduced you to the wholesaler. It is a job in the financial services industry you never hear about but may play a significant role in the mutual fund you invest in. To review, in order to get financial advisors to carry their investment products, mutual fund firms employ “wholesalers,” whose job it is to persuade advisors to understand why their funds are better than the rest of the industry.

In this entry, we're going to further explore some dynamics in the wholesaler-financial advisor relationship.

Now, it would be a great to think that an advisor uses their analytical prowess to decipher the mutual fund that is going to beat the index year after year. However, such prowess, particularly for the larger funds and more prevalent asset classes (for example, a Canadian equity fund), is not significantly different from one mutual fund company to another. With this in mind, the advisor's assessment of giving a mutual fund firm his or her client's business shifts to more subjective traits. One of those traits is their relationship with their wholesaler [another can be the trailer fee, which we'll discuss another time].

In essence, the wholesaler-financial advisor relationship is much like the relationship between a financial advisor and their client. Like financial advisors, wholesalers earn a commission (8 to 12 basis points, we've been told, of the assets they are responsible for bringing under management), while earning a salary as well. Like financial advisors, wholesalers are responsible for recruiting their clients (in their case, the financial advisors) and nurturing them.

It is important to note that wholesalers are given what are called expense accounts (according to several sources, a typical expense account can range anywhere from $20,000 to $50,000 for a geographic area depending on the firm) to, among other things, entice advisors to carry their products. These incentives could be, for example, tickets to shows, sporting events or dining out. In the past, such incentives were out of control with all-expense paid trips and more lavish attempts to win a broker's loyalty. Fortunately, much of this has toned down in the last few years. That being said, a financial advisor's loyalty can still be won in such ways. In fact, in many cases, it is the advisor who has come to expect special treatment in return for them investing millions of their clients' money with a specific firm.

Now, yes, all is fair in love and war, but when you think about it, there can be about 20 wholesalers for the typical mutual fund company (maybe four wholesalers assigned to Ontario, for example). And these five figure expense accounts per wholesaler would be more beneficial to the Canadian client lowering the fund's MER. Of course persuading advisors to carry their products is important, but eliminate or reduce the expense accounts, I say. Let a financial advisor pick a mutual fund on the merits of the fund alone. Let the wholesaler's job be solely to preach the merits of their fund.

The feeling is, though, this is not the start of a groundbreaking movement.

Got to be...Are you underperforming or outperforming your relative benchmark?

Wow, so sorry fans, it has been ages, since I've written....The last couple of months have been incredibly intense, and while I've been tempted to write on several occasions, the dynamic at the office has been such that's it has been hard to tear myself away from the day-to-day. Very unwise, said the incredibly helpful SEO consultant, I met at an expo a couple weeks back.

"You got to be blogging at least 2 or 3 times a week," he said.
"But..."
"Got to be."
"But, the purpose of us having a corporate blog was to give Canadians insight regarding our thoughts in improving the retail investment industry, giving them a pulse for the way our company thinks and believes. We weren't really thinking about search engine results."
"Got to be."

Okay, with "Got to be" the theme for this blog entry, I will proceed. Obviously, writing a blog entry once every month is a little too infrequent. I acknowledge that.

Anyway, if you are a subscriber to this blog, you are fully aware of the state of the economy. Many of you have probably inundated yourselves with all sorts of commentary about what's going on. You can pretty much find a pundit point in every direction. Up...down....sideways.

As horrific as this loss of wealth has been for Canadians, for the first time since Onus was founded, people are engaged. They are conscious of what's going on. This concern, although it has come with a cost, should be cause for victory in the sense that many Canadians are no longer taking anything for granted and are asking the right questions.

Listen, people, there's no sugar coating it. A financial advisor that says that his clients are completely unscathed is either inaccurate or lying (for me to say which would be inappropriate, for I would have to qualify their intentions). If you have any exposure to the markets, your portfolio has suffered. The relevant question is: By how much? Was your asset allocation appropriate?

If you have questions regarding your current situation, allow me to outline an important one and give you the tools to answer it: How is your porfolio doing compared to your relative benchmark? A relative benchmark tells you the performance of your investment portfolio relative to a market index (for example, the Dow Jones Industrial Index). Money managers and investment analysts are evaluated by their ability to outperform their relative benchmark. As a client paying active management fees (assuming you're not employing indexing strategies), you're paying for your investments to be able to do better than the respective index. Otherwise, you could seriously reduce your fees by investing in index funds or ETFs while getting better returns then an active manager.

How do you calculate the return of your relative benchmark?

If your advisor and you have not predetermined the benchmark that will be used to evaluate your returns (material that should be in your Investment Policy Statement), visit www.showmethebenchmark.ca set up by my hero, Warren MacKenzie, and other fee-based financial advisors. Calculate your relative benchmark using the Benchmark Calculator and compare them to your returns. It is an excellent way of judging your financial advisor's (or, for that matter, your own) performance.

It's safe to say if you underperform your relative benchmark once over the last five years, it isn't grounds alone to conclude unsatisfactory financial advice. However, if year after year, you're underperforming your relative benchmark, you should take more than a moment to evaluate your current situation.

Do you know the answer to this question? Got to be.