Practice Management

An ETF Platform for Advisors by Advisors

How does a small MFDA dealer survive – and thrive – against a backdrop of consolidation, regulatory challenges, fee pressure, and media scrutiny around the value of advice? By launching an ETF platform to level the playing field, and creating a unique culture of Advisor autonomy, flexibility and prosperity. Leo Belmonte, veteran investment professional, and CEO of Security Financial Services & Investment Corp., shares his story with Insights.
March 2019

Leo Belmonte

CFP, FMA, FCSI, AMP, Chief Executive Officer, Security Financial Services & Investment Corp.

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How does a small MFDA dealer survive – and thrive – against a backdrop of consolidation, regulatory challenges, fee pressure, and media scrutiny around the value of advice? By launching an ETF platform to level the playing field, and creating a unique culture of Advisor autonomy, flexibility and prosperity. Leo Belmonte, veteran investment professional, and CEO of Security Financial Services & Investment Corp., shares his story with Insights.

Closing the MFDA/IIROC gap

At a certain point it became obvious to me that in order for small to mid-sized MFDA dealers to survive, it would be necessary to offer an ETF platform to minimize the competitive advantage of a full IIROC model. I say this as an Advisor with experience in all channels – proprietary and independent MFDA, as well as full-service brokerage. The MFDA/IIROC gap has long been fueled by a perceived stigma associated with mutual funds and the phenomenal growth of the ETF market – and is now growing wider with the media scrutiny around fees and value.

This gap wasn’t a revelation; the ability of IIROC-regulated professionals to utilize any type of security was something I had exposure to early in my career, along with the subsequent related emerging trend – a shift in investment approach from a trade execution model, prevalent in the ‘80s and ‘90s, towards holistic wealth management and fee-for-service accounts.

IIROC-licensed Advisors may have a tough time relating, but for an MFDA firm like ours, onboarding ETFs as a “standard” offering was not easy, requiring an entire buildout of policies and procedures, proficiency training, new technology, and more.

At the helm of Security Financial since 2004, my mandate from the start was to increase our Advisor base and assets under administration, while providing clients with comprehensive financial planning and wealth management. In light of regulatory reform, inherent fee pressure, and the widening MFDA/IIROC gap, we recognized that an ETF trading capability would not only help to level the playing field, it would also be completely aligned with our efforts to grow, recruit investment professionals and contribute to greater choice for our clients. Putting the necessary back-office system in place would also position us among the first MFDA firms to go “live” with full-fledged ETF trading and portfolio management capabilities.

While launching an ETF trading platform made business sense for our firm, it was easier said than done. With finite resources, one of the biggest hurdles was the significant task of augmenting policies and procedures. Behind the scenes, we had to determine processes for how to treat the cash that comes in; how to place the trades; how it all fits within the KYC; the costs associated with buying and selling ETFs, etc. We went back and forth with regulators to establish standards and guidelines – a time-consuming exercise, and particularly challenging given the hats I wear: business development, recruitment and oversight – all while continuing to maintain the high service levels my own client base has come to expect.

Technical execution also had its share of complications. We worked diligently to upgrade our back-office systems to properly support ETF trades, and ensure that key functions, such as daily pricing and fund settlement, were flawlessly integrated. After a successful pilot to work out the kinks, we’re now up and running with trades going through for our first tranche of clients – fee-for-service accounts.

I’m in the trenches, actively managing my own clients, so I understand and appreciate the challenges and opportunities for Advisors.

Advisor proficiency and independence

I’m in the trenches, actively managing my own clients, so I understand and appreciate the challenges and opportunities for Advisors. While I incorporate ETFs as a viable segment of a client portfolio – and communicate the business case for maintaining a competitive edge by offering both active and passive investments – I don’t mandate that Advisors obtain the necessary proficiencies.

To me, it’s no different than attaining a CFP designation. Personally, I feel it helps to build credibility by reinforcing to clients that they’re dealing with someone who abides by a specified code of conduct, but ultimately, each professional has to decide if a certain designation – or the required ETF proficiency, for example, is warranted in their practice.

I set up shop with the objective of allowing Advisors, like myself, to remain truly independent. I treat them like business owners, and as such, they have the right to decide how they want to operate. My role is to grow, foster and support this environment by providing the right tools and technologies to position them for success. And because I’m constantly seeking efficiencies in my own practice, I’m keenly aware of the need to offer Advisors a compliant, profitable and evolving platform.

Technology is another driver; we continually seek ways to help Advisors with the increasing burden of paperwork, compliance and regulatory oversight.

Growth without sacrificing a boutique culture

To put this in context, I categorize the big banks as Tier One; mid-sized dealer firms as Tier Two; and my firm – currently with 20 Advisors (and growing) and 6 full-time employees – as Tier Three.

Recently, we onboarded an MGA called LifePlan Investments, a company that was ready to move forward with a Tier Two dealer until I caught wind of their intention to provide their insurance Advisors with a platform for growth, while retaining autonomy. It’s definitely a win-win given the alignment, the recruitment opportunity for us, and the investment solution for LifePlan – greater choice, with access to ETFs in addition to mutual funds and insurance.

In terms of our trajectory, I feel that this alliance speaks to untapped possibilities – namely, other MFDA dealers without an ETF platform. The reality is, while the industry is consolidating, there’s growth potential for smaller independent shops with adequate resources to withstand the compliance burden, regulatory oversight and rising costs associated with running a dealer – coupled with the inherent revenue challenge associated with the decline of the DSC model.

At the individual Advisor level, there’s also been a shift as Tier One and Tier Two organizations establish higher minimum thresholds for assets under management. We don’t impose that pressure; in fact, we’re positioned to recruit Advisors who have been displaced because of swelling targets.

I’ve worked hard to create a culture that attracts Advisors who respond to autonomy, and clients who appreciate a family environment. The key to growth without losing that spirit will be to stay true to my priorities – communication and follow through. I maintain an open-door policy, accessible to my team (compliance officers, operations managers and licensed associates) and ready to discuss anything of importance to the practice. Similarly, when it comes to clients – or Advisors who want to discuss a client situation – I respond the same day to emails, phone calls, and voicemails. It’s not easy being pulled in multiple directions, but it’s very satisfying to be able to help, and it’s in keeping with my simple motto: do what you say and say what you do.

ETFs that align with my get-paid-while-you-wait approach

Despite access to all of the major providers, we launched our platform exclusively with BMO Global Asset Management’s ETFs. From a client perspective, BMO is a recognized brand, which offers peace-of-mind. Personally, I like the flexibility of the product shelf; if a client is not a candidate for individual ETFs, chances are, BMO has a fund to fit the objectives, whether the priority is to save on fees, reduce volatility or increase returns.

If I want to take advantage of a tactical covered call overlay for someone who is not in a fee-for-service account, I can get it through the BMO Covered Call Canadian Banks ETF Fund. And if you look at the pricing, it’s the same. In a fee-for-service account, the ETF is 70 basis points plus my 1% fee, and if I buy the Fund version, guess what? It’s 1.7%. Plus, it fits into my get-paid-while-you-wait approach – growth and an additional income stream from underlying equity investments, all with reduced risk. In fact, every mandate in my client portfolios produces a distribution, whether it’s from a diversified fixed income solution, traditional dividend-focused equity solution or an alternative solution.

I try to lead by example, starting with expressing gratitude for the relationships I have. This has been warmly reflected back to me on my testimonial website: myclientfeedback.ca.

Advisor recruitment – the common denominator

While flexibility and autonomy are key selling points for the firm’s Advisor recruitment, we seem to attract like-minded professionals – those who have integrity, an ethical code of conduct, and a similar overall investment management style. Most, like me, happen to be CFPs, and the overwhelming majority are embracing the ETF platform as an opportunity to stay competitive and enhance their value.

I’ve put a lot of energy into creating an environment that resonates with Advisors who put the interests of clients first, and also seek the best possible compensation with the most autonomy – total flexibility when it comes to service model, approach and product shelf.

So far, it’s working. My efforts have been rewarded, and as we grow I’m committed to preserving the culture.

For business building ideas, or insight into our expansive line-up of unbiased investment solutions – ETFs, Mutual Funds and ETF-Based Mutual Funds – contact your BMO Global Asset Management Regional Sales Representative.

Security Financial Services & Investment Corp. Disclosure:

This material is provided for general information and is not to be construed as an offer or solicitation for the sale or purchase of mutual funds mentioned herein. Past performance may not be repeated. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please seek individual financial advice based on your personal circumstances. However, neither the author nor Security Financial Services & Investment Corp. makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use or reliance on this report or its contents. Security Financial Services & Investment Corp. is a member of the Mutual Fund Dealer’s Association which also includes protection under the Investor Protection Corporation Fund.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus or fund facts before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.

BMO Global Asset Management Disclosures:

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss.

BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.

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