Credentials and licensing leader at CSI backs MFDA's proposed proficiency rule for advisors to distribute liquid alts
In late November, the Mutual Fund Dealers Association of Canada (MFDA) published a proposed proficiency requirement for advisors and other appointed persons at member firms to satisfy in order to distribute alternative mutual funds. That rule, which is out for comment until January 24, represents a small but meaningful step to address a long-standing gap in Canadian retail investors’ portfolios.
“Alternative mutual funds, or liquid alts, came into existence a lot earlier in the U.S. than in Canada, and they did see quite a bit of interest,” Marshall Beyer, senior director, Credentials and Licensing Strategy at the Canadian Securities Institute, told Wealth Professional. “They weren’t very available to Canadians up until January 2019, which is when the regulators effectively approved them to be sold to retail investors.”
Traditionally, alternatives were exempt-market products that were available only for accredited and institutional investors to use. But with the introduction of alternative mutual funds, retail investors were able to access hedge fund-like strategies that offered a whole new world of benefits beyond the long-only equity and fixed-income engines under the hoods of traditional mutual funds.
“Alternative investments do provide diversification,” Beyer said. “They provide alpha, they can incrementally increase your risk-adjusted returns … there’s a variety of benefits to being able to add alternative strategies into a portfolio, and I think it was a bit unfair that retail investors didn’t have access to them for so long.”
Even with the introduction of liquid alts in 2019, the Canadian investment space remained uneven. The proficiency requirements for advisors with the Investment Industry Regulatory Organization of Canada (IIROC) already made them informed about shorting, leverage, and other sophisticated strategies that could be interlocked in different ways to create alternative mutual funds. That gave them a head start that for non-IIROC advisors, including those from the MFDA, was exceedingly difficult to overcome.
“You have to realize that the mutual fund space consists of two worlds,” Beyer said. “One is the world of the big banks’ retail business units, where most client-facing individuals are mutual fund-licensed and selling GICs, RRSPs, and more vanilla financial products. The other half of the market, the independent mutual fund dealers, is where you’ll see more interest in offering alternative mutual funds.”
For years, a non-IIROC advisor would have to fulfill an onerous additional proficiency requirement before they could deal in alternative mutual funds. That barrier was lowered in January when the Canadian Securities Administrators (CSA) issued blanket orders that opened a new, less demanding path through bridging courses offered by CSI as well as the IFSE Institute. With its proposed proficiency rule, the MFDA is providing a more solid endorsement for its members to offer liquid alts to clients.
That’s not the only incentive for MFDA members to take the plunge. As Beyer noted, the self-regulator introduced new continuing education requirements that became effective on December 1. An MFDA advisor may choose to satisfy those requirements, as well as their own curiosity, by expanding their professional knowledge into the domain of alternative mutual funds.
“In creating our bridge course, we worked with the MFDA as well as the IFSE Institute to come up with a standard curriculum,” Beyer said. “We wanted to ensure someone was knowledgeable and knew their product when it comes to selling liquid alts to retail clients, and understood the rationale behind adding alternatives to a portfolio.”
Those who go through the CSI bridging course, Beyer said, will be educated on the different strategies and structures – including long-short strategies, leveraged strategies, and open-ended funds – as well as the associated pros and cons. They’d also be oriented on the suitability aspect, which would focus on what sort of clients each strategy would be a good fit for.
Beyond the curriculum itself, the CSI makes the program convenient for interested firms and individuals by offering it online and on-demand. Another differentiator for CSI, he said, is their tracking and reporting service to help client firms make sure that the people who need to take the course are enrolled and active.
“We have been seeing a steady pickup in enrollments over the quarter, which indicates to us that professionals in the mutual fund world are interested in taking this course to sell those products,” Beyer said.
Many firms may shy away from having alternative mutual funds on their shelf for advisors. As part of the incoming second phase of client focused reforms, advisors are facing stricter know-your-product requirements, which is causing some firms to rethink and rationalize their catalogs to exclude overly sophisticated products. But to Beyer, a truly client-centric firm should go the other way.
“I think to truly act in the best interests of clients, we should make sure advisors have a breadth of product offerings to deliver different portfolio benefits,” he said. “Alternative mutual funds aren’t for everyone, but they deserve to be in the toolbox for clients where they’re suitable.”