B10 | REPORTONBUSINESS OTHEGLOBEANDMAIL | SATURDAY, NOVEMBER 2, 2019
T
he Federation of Mutual
Fund Dealers (FMFD) has
issued a new guideline to
its members on how to limit and
track the promotional items and
activities their financial advisers
can accept from mutual-fund
companies.
The guideline, set to take effect
on Jan. 1, 2020, includes a $1,500
annual limit that mutual-fund
companies, which manufacture
and then promote their mutual
funds, can spend on promotional
items or activities such as dinners
or event tickets for each adviser.
The amount must also not ex-
ceed $375 an item or event for
each quarter, which is 25 per cent
of the annual $1,500. Dealers also
aren’t required to track spending
on items and activities less than
$100.
The guideline aligns with the
changing culture of the financial-
services industry, away from the
old days when some mutual-
fund companies would shower
advisers with lavish gifts such as
expensive trips, tickets to high-
end events or luxury goods and
toward more modest relation-
ship-building exercises.
The mutual-fund industry is
under growing pressure to reduce
costs amid intensifying competi-
tion from exchange-traded funds
and robo-advisers. There’s also a
push to increase transparency
around how companies do busi-
ness with advisers.
“The culture is changing to a
more professional, more compli-
ant and more client-centric and
holistic financial-planning envi-
ronment,” says Matthew Latimer,
executive director of the FMFD, a
group that lobbies on behalf of
the dealers the Mutual Fund
Dealers Association of Canada
(MFDA) regulates.
“Excessive spending is often-
times not useful or unwelcome at
the advisory level,” Mr. Latimer
says. “Advisers want to be work-
ing on the same side of the table
as their clients.”
The guideline, which will be
reviewed annually, was designed
in consultation with dealers and
mutual-fund companies, as well
as other industry associations
and regulatory bodies including
the MFDA and the Ontario Securi-
ties Commission, Mr. Latimer
says.
It comes after the release of an
MFDA bulletin in March, which
looked at the use of promotional
items and conflicts of interest in
the mutual-fund industry. The
MFDA performed a review of
dealers’ practices, which showed
many firms either didn’t have
procedures in place for tracking
promotional items their advisers
received from mutual-fund com-
panies, or their policies didn’t
provide enough guidance to ad-
visers around conflicts of
interest.
The MFDA didn’t recommend
dollar limits, but encouraged
members to review how much
their advisers received in promo-
tional spending from mutual-
fund companies and develop pol-
icies based on that knowledge.
Still, there was some misunder-
standing about the MFDA’s posi-
tion, including around record-
keeping of promotional activity,
Mr. Latimer says.The FMFD was tasked with de-
veloping a guideline for the in-
dustry to follow, including poli-
cies and procedures to track pro-
motional items and events.
“The federation needed to take
a bold stance to assist the indus-
try in getting a handle on moving
forward on this file,” Mr. Latimer
says. “Now that we have the first
step in place, which is our guide-
line, we can all work together on
what’s next.”
Although the guideline isn’t
mandatory, Mr. Latimer says
companies that don’t fall within
the ranges will “stick out like a
sore thumb” in regulatory audits.
“We do hope they adopt it,” he
says. “At the end of the day, the
federation and its membership
agree with the MFDA and its pol-
icies to reduce potential conflicts
of interest in the area of promo-
tional items and event spending
for the benefit of Canadians re-
ceiving the best possible and
least influenced advice.”
Mark Kent, president and chief
executive at Portfolio Strategies
Corp., a Calgary-based mutual-
fund dealer with about $3.3-bil-
lion in assets, and an FMFD board
member, says the guideline pro-vides some much-needed clarity
across the industry.
“It’s important that there be
some clarity around what could
be offside and how much has to
be tracked,” he says. “It’s impor-
tant to strike a balance to get rid
of the really abusive sales practic-
es, which, quite frankly, I think
were wrung out of the industry
many years ago. I guess it can still
happen on a one-off basis, we just
haven’t really seen it.”
The guideline should also re-
move any unfair advantages be-
tween large and small firms. “It
should level the playing field,”
Mr. Kent says, adding that it will
also help advisers who are
“painstakingly focused on never
being perceived as being in a con-
flict of interest with their clients.”
Michael Stanley, president of
Sterling Mutuals Inc., a Windsor,
Ont.-based mutual-fund dealer
with approximately $4-billion in
assets, describes the spending
limits as “reasonable,” while still
recognizing the importance of
mutual-fund companies to be
able to remain in touch with ad-
visers.
“This is still very much a rela-
tionship business,” says Mr. Stan-ley, whose firm’s chief executive,
Nelson Cheng, is on the FMFD’s
board. “There’s still a need for
face to face communication and
education and relationships. The
guideline shows that’s impor-
tant. Rather than have no limit or
zero dollars as a limit, it says,
‘This is the maximum that would
be deemed appropriate for any
given year or quarter.’ It does al-
low for a breakfast or dinner, but
nothing that’s lavish or extrava-
gant that could sway the influen-
ce of investment recommenda-
tions to Canadians.”
Mr. Stanley also believes the
guideline will help advisers feel
more confident in their relation-
ships with mutual-fund compa-
nies and clients.
“Advisers now have bright
lines, so there can’t be any debate
now over what we feel is appro-
priate or inappropriate, which
wasn’t there before,” he says.
“The fact that this is going to be
reviewed annually is also posi-
tive. ... It’s just good guidance
and good collaboration with the
regulators ... for the benefit of all
aspects of our business.”SpecialtoTheGlobeandMailNewguidelinelimitspromotional
spendinginmutual-fundindustry
Non-mandatory
recommendation
advisescompaniesto
capexpensesforevents,
tripsforfinancial
advisersat$1,500ayear
BRENDA BOUW
ISTOCKE
xchange-traded funds that
track millennial spending
are soaring, but have been
slower to attract investment as
investors debate betting on gen-
erational preferences.
As millennials gain buying
power, generation-themed funds
such as Global X Millennials The-
matic ETF (MILN) and Principal
Millennials Index ETF (GENY)
have emerged to offer baskets of
companies that are typically of
interest to the generation of peo-
ple born between 1980 and 2000,
with top holdings including Ap-
ple Inc., the Walt Disney Co. and
Adidas AG.
But with consumer discretion-
ary and technology – more vola-
tile stocks, especially during mar-
ket downturns – making up near-
ly 80 per cent of MILN and GENY,
investors with short-term invest-
ment goals could struggle under
these funds.
“Millennials could possibly
spend more money on the things
they know, but young people
tend to be more interested in
things like Netflix, bitcoin and
cannabis stocks,” says Larry Ber-
man, co-founder and chief in-
vestment officer of ETF Capital
Management. “You’re overcon-
centrated in something that is ve-
ry volatile for your portfolio. It
could potentially offer long-term
wins, but could be catastrophic
too.”
Millennial-focused funds at-
tempt to anticipate the products
and services that the generation
will use the most and where their
spending is expected to surge.
Millennial spending could grow
to US$1.4-trillion annually in the
United States by 2020 and would
represent 30 per cent of total re-
tail sales, according to a report by
Accenture. MILN tracks U.S. com-
panies includingUber Technolo-
gies Inc.,Starbucks Corp.and
Spotify Technology SA, while
GENY takes a global approach
with holdings such asHennes &
Mauritz AB,Just Eat PLCand
Facebook Inc.
However, recent disappoint-
ments in the public debut of
companies such as Uber andLyft
Inc., which are trading below
their initial public offering prices,
and concerns over a looming re-
cession, have caused investors to
become skittish on lofty valua-
tions and consumer spending.
However, if an investor in-
tends to buy-in for the long haul,
the current environment could
present an opportunity to buy
low and watch the price climb
over the next few decades, says
Michael Kovacs, chief executive
of Harvest Portfolios Group.
“Uber did have a bit of a rough
start, but over the long-term,
companies like Uber and Lyft will
be bigger parts of our society
with autonomous driving and
taxis,” he says.
“You have to take the position
that whatever tech stock you’re
investing in will be bigger 10
years from now than it is today,
and you make your investment
and you wait.”
Both ETFs have climbed since
launching in 2016, with MILN re-
turning 18 per cent over the past
year and GENY up 16 per cent as
of Oct. 30, according to Bloom-
berg data. But in the more than
three years since the ETFs
launched, MILN and GENY have
garnered a relatively low level of
investment, with about US$73-
million and US$22-million re-
spectively in assets.
Generational perspectives on
investing could be hindering in-
vestment in millennial-focused
ETFs. While the funds are still
small, the younger generation is
only just starting to dabble in in-
vesting, and that will surge over
the next decade, according to Mr.
Kovacs.
For baby boomers with moreshort-term investment goals,
gambling on companies that
could see significant perform-
ance pressure over the next few
years may not be appealing.
“Millennials have a long in-
vestment horizon in front of
them, whereas someone looking
at retirement in five or 10 years
doesn’t,” Mr. Kovacs says.
Investors that have the flexi-
bility to take on a higher level of
risk for long-term gains should
still diversify their portfolios with
more stable utilities and con-
sumer staples companies, says
Leanna Haakons, founder and
president of Black Hawk Finan-
cial Inc.
The millennial ETFs’ holdings
in defensive stocks are low, with
consumer staples, financial ser-
vices and real estate making up
only about 17 per cent of GENY.
“They’re going to try to bal-
ance out their weightings of dif-
ferent sectors so that it doesn’t
drop 80 per cent in a recession,”
Ms. Haakons says. “But it’s im-
portant to know that it’s good to
have a balance of investments,
like income-focused investments
that will hold up better in a reces-
sion than an ETF with a bunch of
growth stocks that are likely to
take a big hit.”
And MILN and GENY omit
more reliable sectors that could
see substantial growth as the ba-
by boomer population ages, such
as health care – which is absent
from both millennial-focused
ETFs, Mr. Berman says.
“That’s a big miss of an impor-
tant growth area for the future,”
he says.
“Let’s not ignore the retiree
population because that’s equal-
ly as powerful in terms of discre-
tionary spending. Concentrating
your portfolio in consumption is
fine, but not just for the millen-
nial block.”
Beyond broader millennial-fo-
cused ETFs, niche thematic funds
that zero in on specific sectorssuch as artificial intelligence, au-
tonomous vehicles and lifestyle
and entertainment would align
with generational interests, Ms.
Haakons says.
Funds that follow the millen-
nial shift, such as the Power-
Shares Dynamic Leisure & Enter-
tainment, GlobalX Autonomous
& Electric Vehicles ETF and The
Organics ETF, bet on the rising
popularity of changing consumer
habits among people in their
early 20s to late 30s. And invest-
ing based on interests makes in-
vesting more palatable for novice
millennial investors, Ms. Haa-
kons says.
“There is an ETF for everything- luxury goods, gaming, canna-
bis, CBD-related therapies and
pets,” Ms. Haakons says. “You can
start investing by finding a fund
of something that you’re interest-
ed [in], which is a lot easier than
10 years ago when I was talking to
people about just finding a com-
pany that you’re interested in,
which is a lot more volatile and
riskier than an ETF.”
But overeagerness in thematic
investing leads to overconcentra-
tion in certain sectors, and that
could be catastrophic for an in-
vestor, Mr. Berman says. The suc-
cess of narrow technology funds
will ultimately depend on which
sector, such as robotics and
blockchain, garners the most
adoption over time. Meantime,
share prices will fluctuate dra-
matically.
“You’ll have companies that
make it and those that don’t,” Mr.
Berman says.
“So you talk about technology,
but is it an Uber, [an] Amazon or
an AI company that is going to
actually reduce jobs and change
industries. There’s a lot to think
about within the whole sphere,
so make sure you’re diversified
and don’t make a big bet on one
theme.”
Special to The Globe and MailGeneration-themedETFscouldbeariskychoiceforinvestors
STEFANIE MAROTTA
Millennialshave
alonginvestment
horizoninfront
ofthem,whereas
someonelooking
atretirementinfive
or10yearsdoesn’t.MICHAEL KOVACS
CEOOFHARVEST
PORTFOLIOSGROUP