Are MFDA advisors missing out on ETFs?

By Christopher Mason | November 28, 2011 | Last updated on November 28, 2011
4 min read

The growth of ETFs has reinvigorated the debate over the merits of MFDA and IIROC licensing, and more specifically whether an MFDA-licensed advisor can adequately access the fast-growing sector.

Initially, ETFs were only available to IIROC licensees. More recently, however, MFDA advisors have been able to access that market segment through mutual funds comprised of ETFs. But the question remains whether that solution works for the long term or is merely a Band-Aid.

While clients may at this point appear indifferent about how their advisors are licensed, many of the fund-packaged ETFs still contain a layer of fees. So an MFDA advisor needs to at least anticipate an investor asking why she would want that option over a straight ETF.

The answer is that IIROC licensing is a massive change, says Mark Barnicutt, president of HighView Financial Group in Oakville, Ont. “It costs time, money and distraction to make that conversion, but it can be worthwhile if broad product offerings are important for you and your clients.”

Even once you’ve completed the courses, the process of moving clients to the new platform can take months and once settled into the new system, an IIROC advisor has to keep up-to-date on a vastly expanded array of products. “That can be overwhelming,” Barnicutt says.

MaryAnn Kokan-Nyhof agrees. “The more options you have available, the more you need to know about those options,” says the MFDA-licensed CFP and vice-president of MGI Financial’s Kilcona branch in Winnipeg. “I have learned a handful of styles and I know them inside and out. [You can’t] pretend you can be an expert in every available option.”

Kokan-Nyhof considered the merits of switching to IIROC licensing, but decided to stay with MFDA.

She’s since increased the use of mutual fund-wrapped ETFs in her clients’ portfolios, and finds them useful for accessing lower-cost investments.


Changing licensure may also involve changing dealership. That may be more onerous than clients expect. So present the options: explain the hassle of moving to another firm, and ask whether paying a few basis points to maintain a working relationship is worth it.

Besides, “I don’t think you have to move anymore,” says DundeeWealth advisor Bruce Cumming, who’s passionate about index investing and switched from MFDA to IIROC licensure in 2008 specifically to sell ETFs. Now that they’re available in a wrapper, “the Herculean effort required to move can be avoided.”

Cumming doesn’t regret the switch, because his Oakville-based practice has grown substantially due to his expanded product shelf. But from a strictly ETF perspective, had the fund-wrapped products been available, “I could have had access to fundamental indexing with PowerShares, and market cap indexing with BMO.”

To reduce the fee gap between an ETF and a fund-wrapped version, consider F-class funds under a fee-for-service model. That might be a better switch than a change of licensure, says Cumming. “The regulators don’t want embedded fees. We should be getting away from trailers.”

To get close to an IIROC advisor’s fees, “the MFDA guy has to be on a fee-for-service platform,” says Cumming. “He’s got to be able to sell indexes as F-class and add his fee on top. That’s all taken care of for me in the IIROC world. I can plagiarize the wrap accounts’ asset mix and use ETFs instead of active managers, all for 30 basis points. And then I’ll add my 1% fee that’s tax-deductible. You’ve got institutional pricing—lower than pension funds after the tax deductions.”

There’s still a spread—MFDA advisors can get just under 2% with F-class funds—but it’s certainly smaller, which will help in attracting the price-sensitive wealthy. “You can’t be selling mutual funds to $2-million-dollar clients,” says Cumming.

Barnicutt agrees. “The closer you get to the million-dollar level, you begin to have to look at alternative solutions that are akin to the ones you see on the IIROC platform and with investment counsellors.”

An MFDA advisor can suggest the client open an electronic brokerage account, or work with a third party to purchase ETFs, with the existing advisor staying on to provide advice.

One branch manager in Markham, Ont. has directed about 20% of his clients’ ETF investments into straight ETFs via HAHN Investment Stewards in return for referral fees. This, he says, has proven an effective way to offer a broader range of investment tools without going through the hassle of re-registration.

“Over the next few years I’m looking to double our ETF exposure, and my preference would be” to continue using a third party, he says. “We see it as best of both worlds.”

Of course, adding layers between the client and the ETF will always add costs. Nobody but you can gauge the fee sensitivity of your clients, and ultimately, that should drive the decision to make any changes in your practice.

Christopher Mason