Life-cycle funds may be ideal for bank channel

By Gavin Adamson | December 22, 2005 | Last updated on December 22, 2005
6 min read

(December 2005) This past year may be best remembered for the continued rally in resources, or the various developments in the income trust sector, but it also marked the launch of a new product line that has quietly gathered significant assets for the fund companies behind them.

Life-cycle funds aim to reduce the workload of the distribution channel by automatically adjusting asset allocations according to a investor-selected target date for retirement. Advisors may find that the raft of life cycle fund product coming their way has some appeal, but the banks may stand to sweep up the most assets.

Toronto-based Clarington Funds launched Canada’s first set of life-cycle funds — their Target Click series of four funds — more than nine months ago and it’s time to take stock. Since then literally dozens of these products have hit the market, from manufacturers like Russell Investment Group, SunLife Financial and McLean Budden, to name a few — and the picture is getting clearer about how the products will fit in the advice channel.

While Clarington’s sales were slow to start, Eric Frape, Clarington’s vice president of product management in Toronto, says they have met high expectations, bringing in more than $86 million to the second week of December. “There’s been more of an education and a learning process for advisors and their clients about how these will fit into portfolios,” says Frape. “The interest is ramping up and we think it will continue to do so.”

Canadian data is still scarce, but the industry’s hopes rest partly in the huge success of the product south of the border, where it’s sold through many channels — including as a low-load product — since 2002. That year, during the height of equity risk aversion, the life cycle funds attracted just less than 40% of all equity mutual fund sales. Since then the product has generally accounted for between 15 to 20% of all equity mutual funds sales. In the second quarter of 2005, the figure was at 17.1%.

Generally, these products remove asset allocation and rebalancing investment decisions that historically have been done by a planner or advisor, placing those calculations in the hands of the manufacturer, which automatically sets them according to a pre-determined time horizon for retirement.

“Risk profile is largely driven by time horizon,” explains Wusooq Khaleeli, product strategist for Ethical Funds, which launched five funds with target dates ranging from 2010 to 2040. “Obviously there are some subtleties with regard to individual investors, but by and large it’s a model that seems to work. Once you determine the investor’s risk profile to see if this is suitable for investment for them, then you place them into their time horizon fund, and really it’s a one-stop shop in terms of getting them to that destination appropriately.”

Life cycle funds entered the Canadian market through the group-pension channel, but it’s an “on-going debate in Canada about where the product fits into the advice channel,” says Cynthia Enns, a partner at Credo Consulting, a firm that advises financial services companies on product development.

For example, Vancouver-based Ethical Funds is owned wholly by the Credit Union system and Khaleeli says that, by and large, it’s the branch network that will see the appeal of the product. “It’s an ideal product for that type of sales force,” he says.

While banks are generally slower to wade into new product types, Credo’s Enns says she wouldn’t be surprised to see more of them enter this arena.

“I think the big winners of this sort of product would be the banks, [which] have the direct consumer who want the simple product, and not big asset levels,” she says. So far, CIBC Securities and Scotia Securities have led as early adopters.

Enns adds that the financial planning and traditional advisory channel is likely a smaller portion of the market.

“Where it works for the advice channel is when you have advisor who doesn’t see himself as an investment advisor but more as a financial planner who isn’t trying to substantiate their fees with stock and fund picks, and who can use this is a turnkey product to allow [the financial planning] to happen,” she says.

Fidelity Canada, whose US parent has been selling this product in heaps through its low-load fund channel, says the product is appealing to a wider array of advisors than it had anticipated in Canada. The Toronto-based firm launched ClearPath Retirement Portfolios, a series of nine funds with target dates stretching from 2005 to 2045 with a flurry of retail advertising in October, undertook at 24-city road show throughout November. The firm has seen $50 million flow into its product, out-pacing expectations, says Michael Barnett, senior vice president of advisor distribution for Fidelity Canada.

“What I would say, based on our discussion with advisors, is that advisors will use this for all different types of clients in their business,” says Barnett. “We haven’t gone to market and said that this is intended to manage the low end of your book. One of our first tickets was $1.5 million — and that’s significant.”

Manufacturers are positioning the product as a way for advisors to save time on basic asset allocation, freeing up time to either prospect for more clients, or deepen their relationship with current clients with services and products that are more unique to his or her specific needs.

Advisors weighing both the financial and opportunity costs of servicing clients with modest investable assets — say those with portfolios under $250,000 — against the time they could be spending prospecting and servicing clients with more to invest may consider many managed portfolios, explains Paul Bates, dean of the DeGroote School of Business at McMaster University in Hamilton, Ont., and former broker himself.

But he says he likely wouldn’t spend too much time thinking about the latest packaged funds for his clients. Advisors managing even the most passive of portfolios using this product risk missing incremental opportunities that might arise every quarter, he explains.

“In fact, going back into my past as an advisor, there’s not a single client I wouldn’t have done at least an annual review for, and more likely semi and usually quarterly — even if it’s to do nothing,” says Bates. “The notion of just setting everything on auto is, I think, risky.”

Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates, similarly, sees limited use for the life cycle fund. On the balance, GICs or high-yielding bonds could make more sense than a shorter life cycle product, for example. He concedes that, in instances where a small asset base of funds makes up the bulk of a client’s investments, life cycle funds make some sense.

“But, in terms of their usefulness beyond that situation, part of the problem is that time horizon, while a very important part of development of an asset mix, is but one of many factors that comes into play when designing the asset mix for somebody,” he says.

A risk-taking client may have the identical time horizon as a conservative client, but this product defines them as essentially one-in-the-same. And once you start adding other products to the fray to compensate, then the life cycle funds start making less sense, says Hallett.

Another consideration for advisors and investors, according to Benjamin Poor, a senior analyst Boston-based Cerulli Associates is that some manufacturers may look at life cycle funds as an opportunity to “repackage product,” with two potential downsides. While firms like Fidelity and Vanguard in the US bundle their funds together with no extra management fee, others firms may charge an extra 20 to 100 basis points, “ostensibly to pay for oversight of asset allocation and administration,” he says.

Furthermore, he says some firms may find it’s a good way to bundle strong funds together with long-standing dogs, to give them some fund in-flows. “Right now, we’re kind of in the golden age, where investors might see the benefits of these kinds of funds, but they haven’t questioned how the sausage is made, so to speak,” he says.

Poor says that the market will eventually start to differentiate itself, with manufacturers assembling so-called ‘best of breed’ life-cycle products, in which they package the life-cycle theme around third-party funds.

For advisors who have yet to crack into the coveted high-net-worth client who are equally concerned with the time and costs of doing business, the alternative to these pre-packaged funds is straight-forward in principle, explains Bates at McMaster. “You build a practice around a client base that you know you can work with and if they are going to have a slightly lower asset base than perhaps other portfolios and clients might have, you adjust your cost base of doing business accordingly.”

Gavin Adamson is a freelance business journalist living in Toronto.


Gavin Adamson