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Firms create mutual funds with insurance-like benefits


Two mutual fund companies with national distribution have opened up a new front in the increasingly heated competition to sell investment funds with insurance benefits.

Dynamic Mutual Funds, a mid-sized independent, and the large bank fund complex CIBC Securities have each introduced a new series of so-called "protected" funds. Though technically not insurance policies, they offer some of the most popular advantages of insured funds.

Over specified holding periods- ten years at Dynamic and five years at CIBC- the protected funds guarantee that investors will receive back at least their original capital, no matter how poorly the financial markets might perform. The Dynamic and CIBC funds are the first of their kind to be offered across the country. Earlier this year, National Bank of Canada introduced its own protected series but it is available only in Quebec and New Brunswick.

Protected mutual funds are a competitive response to the strong sales this year of segregated funds, the common name in Canada for funds that are similar to variable insurance policies. A growing number of mutual fund companies, including BPI, C.I., Talvest, Templeton and Trimark, have allied with insurance companies to offer segregated funds.

Protected mutual funds are not interchangeable with segregated funds because they do not offer limited creditor protection, the bypassing of probate fees and other advantages. Also, the CIBC series does not offer death benefits, one of the main attractions of segregated funds.

However, creating protected mutual funds enables fund companies to use their existing distribution channels. Unlike segregated funds, which can be sold only by insurance agents, the protected series of funds can be distributed by anyone who is licensed to sell mutual funds.

It took a couple of years to persuade the Ontario Securities Commission, a trendsetter for regulators across the country, to approve the protected funds, says Terence Buie, the president of Dynamic. In order to satisfy the securities commission, Dynamic had to obtain a letter from the province's insurance regulator saying it had no objection.

The protected funds have, however, received a "very positive" response from independent financial advisors who sell Dynamic funds, says Buie. They appreciate that they are being given a product to sell to enable them to compete with banks and insurance agents.

"We're helping to create a level playing field against index linked GICs on one hand and segregated funds on the other," said Buie. But Dynamic is hedging its distribution bets. It is managing four segregated funds sponsored by Manulife Financial and sold by its insurance agents. And Buie is not ruling out creating another family of Dynamic funds.

"We recognize the insurance channel is important to us," he says.

Meanwhile, Ted Cadsby, president of CIBC Securities, expects to hold a competitive advantage during the upcoming season with his firm's new protected funds. He said he doubts that any other company will match CIBC's five year guarantee term. One of the barriers to entry is obtaining a guarantor, says Cadsby. CIBC has its powerful parent bank Canadian Imperial Bank of Commerce standing behind its fund subsidiary's guarantee. This alternative is unavailable to independent firms, Cadsby says. Because they are index funds, CIBC can offer a shorter period for the maturity guarantee while holding expense ratios below levels charged by most funds offering 10-year-guarantees. Though CIBC offers no death benefits, the five-year guarantee is transferable if the original owner dies, says Cadsby.

Spectrum hikes commissions

Spectrum United Mutual Funds of Toronto has raised the price it is willing to pay for brokers and dealers to sell its back- end load funds. As of Jan. 4, the company will increase its sales commission for nearly all of its funds (excluding money market funds) to six percent. That is up from the previous maximum of five percent, the industry norm.

Spectrum, a wholly owned subsidiary of Sun Life, has historically relied heavily on Sun Life representatives to sell its mutual funds. Spectrum president Gary Corsi said the fund company is "very committed" to increasing the amount of business it does through independent financial advisors.

As part of its revamped commission schedule, Spectrum is extending by two years the period during which deferred sales charges will apply. The new schedule has a seven year life, starting at six percent in the first year, declining in stages to 1.5 percent in the seventh year and zero percent thereafter.

Corsi defended the new schedule as "still very competitive" within the marketplace, especially since the deferred sales charges apply to the original cost of the units, rather than on market value, as is the case with many other load fund firms.

Altamira buys discounter

Altamira Investment Services, the no-load fund company, has made its first move into third party mutual funds by acquiring Mutual Fund Direct, a small discount broker. Mutual Fund Direct, of London, Ont., will continue to operate as an independent entity. It currently has an estimated 6,000 clients and $185 million (Canadian) in assets under administration. Altamira said it will offer 33 third party fund families through Mutual Fund Direct, in addition to its own funds.