PTFs a welcome game-changer

NEW INVESTMENT VEHICLE REPRESENTS A POSITIVE INFLUENCE ON TRANSPARENCY AND FEES

Given the potential that platform- traded funds ( PTFs) have to disrupt the existing Canadian investment landscape, it is surprising just how much of a low profile they have among advisers and investors. Expect that to change in the near future.

PTFs, introduced by investment management company Invesco Canada last year, promise to deliver some of the most attractive attributes of mutual funds (active management and no bid-ask spread) and exchange-traded funds ( processing efficiency and very low fees). PTFs are expected to provide investors with active management at a price comparable to that paid by institutional investors.

Although the concept of combining the best aspects of mutual funds and ETFs into one investment product will most likely catch the attention of investors, it is the tens of thousands of financial advisers across the country who are the primary audience, says Peter Intraligi, president of Invesco Canada.

“We wanted to create an environment where we can reduce the cost of our funds, not just by cutting fees but by reducing inefficiencies in our business, and we wanted to do it in a way where it encourages this transition to a fee- based environment for advisers who are so inclined,” he says. “And we wanted to be competitive when compared to traditional ETFs.”

Platform- traded funds fulfil those ambitious goals. Created for advisers considering the transition to a fee- based model, as well as fee- based advisers acting in either a discretionary or nondiscretionary role, PTF orders are transacted just like ETF orders with their own unique “exchange ticker.” However, unlike ETFs, executions are priced based on end- of- day net-asset value and there are no bid- ask spreads to navigate.

The main attraction for investors is their low cost: Invesco PTF’s management fees run from 0.66% to 1.22%, and are “materially” lower than F-class funds, Invesco notes. F-class funds, introduced in the 1990s and designed as a low-cost option for fee-based investors, do not have trailer fees which are paid out to the adviser.

Intraligi says the dramatic shift to fee- based advisory services in the United States will be swiftly reproduced in Canada.

“That transition is happening rapidly; 90% of the flows with some of the big [ full- service brokerages] went into fee-based accounts last year, and we are seeing a similar trend in Canada.”

Invesco’s PTF product line currently consists of 27 funds grouped among fixed-income, balanced, Canadian equity, American equity and global equity sectors.

Last month, Aequitas Connect announced that Invesco had joined its fund distribution platform, Aequitas PTF Connect, and that its full lineup of funds were available for transacting.

“We see PTFs as a gamechanger for the industry,” says Karl Ottywill, chief operating officer of Aequitas Technology Services Inc. “I fully anticipate these products will change the thinking of the industry; how manufacturers design funds, how dealers position funds through their various distribution channels and how investors approach the use of these funds. After years of unsuccessful attempts to put in place a centralized industry platform to distribute PTFs across Canada, we decided to step in because we i mmediately saw the benefits for investors, advisers, dealers and manufacturers. Leveraging our innova- tive thinking and agility, we implemented Aequitas PTF Connect in less than a year.

“It is fairly early, but we already see the traction. We are having onboarding discussions with dealers and funds manufacturers almost on a daily basis now.”

Purchasing and redeeming PTFs on Aequitas PTF Connect is free for dealers and is available to both discretionary and non-discretionary investment advisers.

Bardya Ziaian, president and chief executive officer of BBS Securities, sees the delivery efficiencies of PTFs providing benefits to investors beyond what they can save in fees. “Transactions are easier for the adviser, the clearing is easier for the dealer and the back office part is easier too, even for the fund manufacturer,” he explains. “So what it does is it reduces the costs of the funds, it reduces the costs of the dealer and it frees up the time of the adviser. All of these efficiencies result in lower costs for the investor and better service from the adviser because he has more time on his hands.

“So in effect the PTF is a way to access actively managed mutual funds at a cost close to what an ETF is trading for on an exchange,” adds Ziaian, who is also the founder of online brokerage Virtual Brokers. “Aequitas Connect is building the new world where better investor service comes together with lower costs.”

The main cost reductions from PTFs are derived from the streamlining of the industry’s distribution model of investment funds.

As Invesco notes in a presentation to advisers, the PTF distribution model allows advisers to take a position across all of their discretionary client accounts in a single transaction, just like any other equity transaction.

Joanne De Laurentiis, president and CEO of the Investment Funds Institute of Canada, says that PTFs have created some early excitement in the financial service industry.

“While it is still in the early stages there is a strong interest in fully exploring the benefits that the PTF solution offers. The interest is particularly strong from the dealers, who are looking for more efficient ways to help their clients own and trade funds,” says De Laurentiis, whose organization represents fund managers, distributors and industry service organizations in the investment funds industry.

Just how quickly the market for PTFs will grow is difficult to determine in these early days, but based on the U. S. example, Invesco’s Intraligi expects the shift from the higher-cost mutual fund model to be dramatic.

“If you fundamentally believe that the regulatory environment will be a catalyst for growth in fee-based (advisory services), then essentially you can look at the entire $1 trillion in full-service brokerages and say, ‘will the bulk of that go to advisory?’ Our view is that over time, it will. In the meantime, we continue to support and offer choice for all advisers, feebased or commission-based, because that approach serves investors’ best interests.”

Intraligi noted that nearly $400 billion of that $1 trillion with full- service brokerages is parked in mutual funds, which could shift to PTFs.

“How quickly that happens, we’ll see.”

WHILE IT IS STILL IN THE EARLY STAGES THERE IS A STRONG INTEREST IN FULLY EXPLORING THE BENEFITS THAT THE PTF SOLUTION OFFERS. THE INTEREST IS PARTICULARLY STRONG FROM THE DEALERS, WHO ARE LOOKING FOR MORE EFFICIENT WANTS TO HELP THEIR CLIENTS OWN AND TRADE THE FUNDS — JOANNE DE LAURENTIIS, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE INVESTMENT FUNDS INSTITUTE OF CANADA I FULLY ANTICIPATE [ PTFs] WILL CHANGE THE THINKING OF THE I NDUSTRY