At Fusion, we strive to deliver focus, confidence and bottom-line results for our clients. For myself, I’m focused on delivering those attributes to the Canadian financial planning industry and the purpose of this blog is to start a dialogue on the future focus of this important industry.

The events of the last four years have had a profound impact on the Canadian mutual fund market as wealth managers around the world were caught ill prepared for the ‘once in a life time’ event. If you listen to the pundits; active management, modern portfolio theory, asset allocation and even diversification have all apparently been discredited.

In their 2005 best seller Blue Ocean Strategy, authors Kim and Mauborgne would recognize the Canadian mutual fund industry as a “red ocean” where the players tweak business models built decades ago in the vain hope that momentum, mass and gravity will over come their competitors. The question confronting us in 2011 is “can this traditional approach still work in the years to come?” At Fusion, we’re convinced that under the surface, there are dangerous forces at play that represent game changing challenges for wealth management and financial planning in the Canadian market. We call them Tidal Forces and 2 of them include:

Shallow waters: Industry players addicted to scale need to feed a voracious thirst for ‘cash flow’ and yet the penetration of mutual fund investments into Canadian households peaked ten years ago. Five mutual fund companies garner 95% of net cash flows amongst long term funds and amongst Mutual Fund dealers a net cash flow of 2% of AUA sets the benchmark. We think the water levels are getting dangerously shallow - leading to increasingly aggressive tactics that chase market share changes measured in decimals.

Class 4 rapids: In Canada, there are over 2,000 mutual funds (6,000+ if you include fund series), over 20 segregated fund complexes and 60 plus ETF’s - all swimming in a pond (the TSX) with only has 3,900 listed companies! Globefund lists over 1,100 funds in it’s miscellaneous asset category alone. Investment product proliferation has led to commoditization, complexity and confusion. With mutual funds a commodity, what happens when Google becomes the investors primary advisor?

What does this mean for Canadian firms in the financial planning market? The answers obviously depend on your firms realities and strategies but, at this point, the most important thing may be to ensure we’re focused on the issue by asking the right questions. For example;

• Is my product shelf sufficiently broad to deliver effective choice to my advisors and their clients who are focused on optimizing portfolio outcomes rather than writing cheques?
• Are my advisors equipped with the right tools and reporting to provide effective portfolio analysis? Are they, at a minimum, better equipped and informed than their clients?
• In a world were product is a commodity, do I have sufficient support structures for my advisors? How do I know if they’re keeping up with the rapidly changing landscape?
• And if that task is daunting for my advisors, how do I ensure my management team, compliance officers and support staff are ahead of the curve as well?

Next time: Navigating turbulent waters - who’s at the helm?

Chuck Grace

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