Taking a different tack?

Big players may be making a move into the exempt market space, but advisors across the country have been slower to steer their clients in the same direction. But that may be about to change.

Taking a different tack?

By: John Tenpenny

Trying to fit a square peg into a round hole – it’s an expression that used to come to mind for many advisors when discussing exempt market products and their suitability for even the most risk-tolerant of clients.

In speaking with advisors across the country regarding their current perceptions and their clients’ attitude towards exempt market opportunities, Wealth Professional is hearing much the same, with many actively ushering clients away from some opportunities.

“Having been an advisor for over 22 years,” says Rob McClelland of The McClelland Financial Group, a specialized distributor of Assante Wealth Management, in Thornhill, Ont. “I have learned to avoid exempt market investments. They don't fit the profile for my average client.”

Big Players, Shifting Attitudes

But those attitudes may soften for a growing number of advisors with exempt market offerings, some from well-established entities, such as Sun Life Financial, which  announced last month that it is planning a major expansion of its asset management business, aiming to sell the insurance firm’s private market and long-term investment expertise to pension funds.

The insurance firm’s executives see huge potential, with managers of defined-benefit pension plans expected to seek more reliable ways to meet their promises to generations of retirees.

“We fully expect we’ll be managing billions of dollars on behalf of institutional clients,” Steve Peacher, Sun Life’s chief investment officer, told reporters at the time of the launch.

In addition to a pooled private fixed income fund, Sun Life said it plans to launch a commercial mortgage fund and a Canadian real estate fund.

Playing it Safe

While Rona Birenbaum, a financial planner with Caring for Clients in Toronto, says their investment dealership is licensed as an exempt market dealer and can make those products available to clients, she says they generally don’t.

“On the whole, I tend to counsel clients away from those products, because they don’t generally offer the same type of protection to investors that a prospectus-issued offering would. There isn’t any sober second look by regulators.”

One of the biggest issues with exempt market investments Birenbaum sees is a potential lack of liquidity.

“Even if they allow for monthly liquidity, in the case that there are a lot of investors in that product wanting to withdraw at the same time, there is a freeze on redemptions and it could take time for clients to actually get their money.

“I think the investment landscape is broad enough that the average investor can access everything they need without going to the exempt market.”

McClelland agrees. “My objective for portfolio management is to keep total costs low (between 1-2 per cent) all in and have complete liquidity. Neither of these requirements work well in the exempt world.”

He also thinks there is often a conflict of interest involved in many exempt market investments. “Their sole purpose has been to make lots of money for the promoter and possibly the advisor – the client a distant third.” (continued)

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Big Risk, Out of Reach


That being said, there are investors who are interested in supporting venture capital in Canada, according to Birenbaum and they, generally speaking, have a great deal of personal wealth and participating in some of these opportunities, which are suitable for a very small percentage of Canadian investors, makes sense for them.

“In my view, it is a very small market and I think an investor has to have a fairly high appetite for risk and a fairly large portfolio to make it a sensible thing to do,” she says.

Real estate-related exempt market opportunities are what she sees attracting some investors.

“Investors looking for yields that are higher than GICs, are seeing exempt products that have fixed-income characteristics where they pay a monthly distribution well above GIC rates, so they are attracted to those products and enquiring about them.”

Sticking with what you know

What it comes down to for Birenbaum is that it is her job as a financial advisor to ensure her clients are fully informed of the associated risks of investment products, including exempt market products, which to some clients look attractive.

“The reality is that is if an investment is paying four times the GIC yield, there has got to be a whole lot more risk associated with that investment and that is something investors, at least when they are inquiring, don’t necessarily appreciate until we get into the nitty-gritty of product.”

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