February 28, 2000
Competition normally eats into market share, but several bank-owned fund operations in Canada are hoping it will do exactly the opposite. They have introduced third-party funds to their retail branch networks, where traditionally only the house brand has been available.
By doing what their surveys say their customers want, bank-fund executives are also counting on a boost to their sales of proprietary products.
"The research made it clear that they wanted advice and they wanted to buy some non-proprietary products," said Ted Cadsby, vice president of managed products for CIBC of Toronto. "Adding third-party product will continue to expand the lead we have over other banks." CIBC's $21.2 billion (all figures in Canadian dollars) no-load fund operation was the only one owned by a bank that gained market share in the industry last year.
In January, CIBC launched the most ambitious effort yet by a Big Five bank, offering third-party load funds at its 1,400 branches. Employing 250 fund specialists, each of which will divide his time among about five branches, CIBC now offers customers a choice of more than 1,200 load funds that are most commonly sold through independent brokers and dealers.
The newest bank to expand into third-party funds is Bank of Montreal, which, like all of the Big Five banks, is based in Toronto. In early February, the bank's First Canadian mutual funds operation expanded its offerings to include a limited selection of non-bank funds.
Unlike CIBC, the third-party funds offered by First Canadian will not be sold on a stand-alone basis. Instead, they will be among the underlying funds available through a wrap-style program. Called CustomSelect, the program requires a minimum $10,000 account size and provides full service advice on asset mix and individual fund picks.
"People are looking to other funds," said Ed Legzdins, president of First Canadian Funds. "We want to be the providers to them." Legzdins is looking for a repeat of the U.S. experience, which he said has shown that higher sales of third-party funds at banks go hand in hand with higher sales of the in-house brand.
"Third-party funds add credibility to our proprietary funds," said Legzdins.
Initially, the CustomSelect program will be offered only in the Toronto area, several other Ontario cities, and in Calgary and Edmonton, both in Alberta. As the current trained sales force of 100 fund specialists grows, probably to about 250 by the end of this year, CustomSelect will be expanded across the country, he said.
Bank of Montreal is being very selective in its use of third-party products. A total of only 14 load funds from only four providers is available through CustomSelect. They are Mackenzie Financial, Fidelity Investments Canada, Trimark Investment Management and AGF Management, all of Toronto. Legzdins said First Canadian kept the list of approved funds short because it was important for its fund specialists to have in-depth knowledge of the products about which they are being asked to provide advice.
Bank of Montreal is also differentiated from independent sellers of load funds in that customers are required to pay a surcharge to include its third-party funds in CustomSelect portfolios. They will be charged an additional 0.75 percent on top of the fund's management expense ratio for the portion of their account that is held in third-party funds. Legzdins said the surcharge is justified because of the "value added" services provided under the wrap program, and because no front or back-end loads will be charged.
For its part, CIBC will emphasize eight major brand names, Cadsby said. They include the six largest - Mackenzie, Fidelity, Trimark, Templeton, AGF and C.I. Also making CIBC's select list are the AIM and Talvest funds. AIM Funds Management is the fastest growing of the Canadian industry's major firms, and Talvest Fund Management is a corporate affiliate of CIBC.
CIBC and Bank of Montreal are not the first banks to expand into third-party funds at the branch level. The pioneer among the Big Five is Toronto Dominion Bank, which has been offering a limited selection of third-party funds since 1996.
Toronto Dominion's third-party initiative has had a fairly low profile lately, and is limited in scope. Currently, only eight third-party funds are offered for sale at the branch level, with AGF and Fidelity the sole suppliers. The major holdout in third party funds is Royal Mutual Funds, the largest bank fund complex, which has shunned third-party funds.
Among smaller financial institutions, the most ambitious marketing of third-party funds has come from foreign-controlled HSBC Bank Canada, formerly Hongkong Bank of Canada. The bank, based in Vancouver, which has 120 branches in Canada, offers funds from 15 independent firms to complement its in-house HSBC family. Janice Book, vice president of wealth management at HSBC's asset management arm in Toronto, said the bank plans to expand its range of offerings over the next few months.