Life-cycle funds may be ideal for bank channel

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.