Investors Group, one of Canada's largest fund-management and financial-planning providers, has made a limited move into fee-based investing with the launch of two new types of accounts. For most clients who qualify, these will be complementary to their holdings in the company's commission-based proprietary mutual funds.
One of the new programs is a separately managed account under the brand name of Azure Managed Investments. It's a discretionary wrap-style account that will enable affluent investors to invest in one or more equity strategies through direct holdings in stocks.
John Guttormson, senior vice-president of product at Investors Group, noted that all seven of the Azure strategies are equity mandates. The stocks held in the Azure accounts, he added, will be selected and weighted according to these strategies. As a discretionary account, Azure enables clients to delegate responsibility for day-to-day investment decisions to their advisors.
The Azure accounts will not be permitted to hold a client's own stock picks, nor other securities such as bonds. Clients who want exposure to fixed income or any other securities or strategies through their Investors Group relationship will need to do so through another account.
One advantage of Azure's direct holdings in stocks, says Guttormson, is that investors in non-registered accounts can benefit from the tax-saving technique known as tax-loss harvesting.
The Azure program starts out with two Canadian equity strategies, one managed internally by I.G. Investment Management Ltd. personnel and the other by Calgary-based Bissett Investment Management, a division of Franklin Templeton Investments Corp.
There are three U.S. equity strategies, one managed internally by I.G. Investment Management, one by an affiliated firm, Putnam Investments, and one by Toronto-based Bristol Gate Capital Partners Inc. The remaining two strategies are North American equities, also managed by I.G., and a Europe Australasia Far East (EAFE) strategy managed by another affiliate, the Toronto-based Ivy team of Mackenzie Investments.
The minimum account size for Azure is $150,000, and the fees charged will vary according to the total amount of household assets held with Investors Group. Assuming no other Investors Group accounts, the management fee charged by Azure for the minimum account size is 2.4%. Assuming $500,000 in total household accounts, the Azure fee declines to 2.15%. Fees are negotiable for accounts of $1 million or more, Guttormson said.
The other new fee-based program is a non-discretionary account offered under the Investors Group brand name. It requires a minimum account size of $100,000 if the client has no other accounts. Otherwise, depending on the size of the client's other accounts with Investors Group, the minimum account size is negotiable.
The fee is 1.35% for household account assets below $500,000, and 1.10% for household accounts above that threshold. Fees are negotiable for household assets above $1 million.
The fee-based account can hold third-party F-series mutual funds, exchange-traded funds or other securities such as bonds. What it can't hold is Investors Group mutual funds. The company continues to be one of the few major fund-management companies that does not offer F-series funds designed for fee-based accounts.
As Guttormson explains, Investors Group's fee-based account enables the company to accommodate new clients who are moving over from other advice-giving firms. Other account-holders will be existing clients who want to deal with Investors Group but may also wish to hold investments that can't be accommodated in the company's regular commission-based accounts.
Both new fee-based programs represent a departure, though very limited in scope, from the prevailing embedded-compensation model for Investors Group's proprietary sales force of 5,380 consultants and its roughly one million clients.
In order to offer the Azure program or fee-based accounts, Investors Group consultants must be registered with the Investment Industry Regulatory Organization of Canada (IIROC), the self-regulatory organization for the brokerage industry. Only a small number -- fewer than 100 -- of the proprietary sales force are IIROC registrants. That number is expected to grow because the company's upgraded back-office platform enables trading in stocks, ETFs, bonds and other securities that require advisors to be registered with IIROC.
The vast majority of Investors Group consultants are registered as mutual-fund dealers and are commission-based. Their fees for service are embedded in the management fees charged by the company's funds, and paid directly to them by Investors Group. This is not unusual since embedded compensation -- mostly in the form of trailer fees paid for as long as the investor remains in the fund -- is the prevailing business model in the advisor-distribution channels of the mutual-fund industry.
Investors Group's introduction of fee-based accounts is consistent with the industry trend of fee-based investing gaining favour among investors. "With a growing segment of affluent Canadians, there is an increased demand for various fee-based structures," said Todd Asman, executive vice-president of products and financial planning for Investors Group, in a Nov. 14 release announcing the new programs. "This growing segment of high-net-worth investors often has broader product needs than traditional mutual funds."
Investors Group's initial move into fee-based accounts comes as securities regulators are actively considering banning embedded compensation for mutual funds, as the United Kingdom and Australia have already done. Such a ban is strongly opposed by most mutual-fund managers, including Investors Group, and by their trade group, the Investment Funds Institute of Canada.
The mutual-fund industry's key argument against banning embedded commissions is that access to advice would be reduced. They contend that it's uneconomic to create fee-based advisory arrangements for small accounts. With their relatively high account-size requirements, Investors Group's two new fee-based programs are consistent with that view.
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