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January 2020
Japan and Europe as well. Japan is coping
with massive fiscal stimulus, but Europe is very fragile and is teetering on the edge of recession. Germany, usually the engine of Europe’s economic growth, has been hurt badly by the global manufacturing reces- sion and its economy has contracted three times in the past six quarters, says Craig Alexander, partner and chief economist with Deloitte Canada in Toronto.
China’s economic growth has slipped below 6% from 6.9% in 2014-18 and 11.7% in 2003-07. There are brighter prospects in other emerging economies, many of which have younger populations, but those prospects are dependent on global growth and vulnerable to rises in the US$, in which much of their debt is denomin- ated. Thus, while many analysts recom- mend overweighting emerging markets, which have low valuations, don’t overdo it.
One of the key questions is whether the
US$ will weaken somewhat. That would be welcomed by the U.S. because it would make U.S. exports more competitive. The potential stumbling block to that scenario is the greenback’s status as the world’s reserve currency. Whenever global risks are high, money flows into US$ for safety reasons.
While the biggest risk is renewed escal- ation of the U.S./China trade war, there’s also the possibility of a U.S./European Union (EU) trade war, which U.S. President Donald Trump has been threatening.
From a global perspective, a downturn in Europe probably would not push the rest of the world into recession. But such a downturn would negatively impact the many countries that export to the region, including the U.S., which buys and sells more from/to the EU than with China. But the issues are less difficult to overcome.
“With Europe, it’s a question of fair trade,” says François Bourdon, global chief investment officer with Fiera Capital Inc. in Montreal. Getting to that point is
a matter of negotiating a level playing field in terms of tariffs and subsidies and doesn’t involve major changes in the way either region operates.
With China, the U.S. is dealing with what Bourdon calls “state capitalism,” in which the government makes up the rules — and wages are much lower than in the U.S.
Other risks include North Korea, which is increasing its nuclear weapons program; social unrest in many regions, including Hong Kong, Venezuela and Argentina; and a messy Brexit.
U.K. Prime Minister Boris Johnson’s win in that country’s December elec- tion means the U.K. is scheduled to leave the EU on Jan. 31. But that leaves the urgent need for both parties to negotiate an agreement that allows for continued smooth trade between the two regions — a deal Johnson wants done by the end of 2020. If that proves impossible, both regions will be hurt and the odds of a
sees gaps in the guidance provided by the MFDA, specifically in its 2017 ETF profi- ciency standard policy. While that policy offers broad guidance, he says, “Firms are seeking regulatory certainty regarding best execution and compliant practices to get a sense of how their trading processes will be viewed during regulatory audits.” For example, member firms have questions regarding the batching of trades.
There also are concerns regarding ETF prices, which can change before a client’s order is placed, Latimer says.
Kent describes the process of making an ETF trade at Portfolio Strategies: an advisor who wants to buy an ETF on behalf of a client digitally signs the order and gets the client to do the same; the order is transferred to Vexo; Vexo transmits the order to Toronto-based Scotia Capital Inc., the IIROC-member firm that handles ETF trades for Portfolio Strategies, for fulfilment.
Originally, Scotia Capital would pro- cess ETF trades two or three times per day, with the timing based on insights from a team that “can see when markets are good vs volatile,” Kent says.
But the MFDA didn’t approve of that, Kent says, due to a potentially long gap between when an order is placed and when it’s filled. The MFDA and its member firms agreed trades should be completed every 60 to 90 minutes. “We said [that was] rea- sonable,” says Kent, “[but] why would you knowingly allow a client to get a bad fill in a really volatile market just because you could do it quickly?”
Due to the potential headaches ETF trading can cause, Latimer says, firms are seeking case-by-case regulatory guid- ance. Thus, ETFs wrapped in mutual funds remain the product of choice. “Many of the issues that surround the trading of ETFs are solved when ETFs are wrapped in mutual funds: [the trades] don’t require additional technology, different staff or [new] oversight processes,” Latimer says.
In 2014, the MFDA developed a detailed information sheet for members wanting to offer ETFs, which included guidance related to best execution and product due diligence.
Know-your-product (KYP) require- ments, which are evolving due to the CSA’s client-focused reforms, also can be daunt- ing. Carte Wealth gets its back-office, com- pliance and proficiency support through partnerships with B2B Bank and Bank of Montreal (both based in Toronto). This arrangement outsources the trading pro- cess, but advisor proficiency responsibility
recession in Europe increase.
Alexander notes that the rise in popu-
lism and nationalism, which tend to be anti-immigration, anti-international co-operation and anti-trade, is behind much of the current tensions. Trump’s “America first” slogan sums this up, but the phenomenon is widespread and is not going away. And in the U.S., Trump may well win the November election despite impeachment proceedings.
There’s also risk of inflation rising, in Bourdon’s view. He believes U.S. wage increases could rise to 4% and push infla- tion up to about 3% by this summer or autumn and force the Fed to raise inter- est rates again.
Energy commodity prices can be a major inflation factor. As 2019 ended, there didn’t appear to be a big risk of oil prices surging. However, Lavoie says, the U.S./Iran ten- sions are a “simple reminder that the oil risk premium is alive and a risk to the global outlook.” IE
falls on Carte Wealth’s shoulders.
Maria Jose Flores, chief compliance offi- cer at Carte Wealth, says the firm partners with fund companies for product education. Firms must ensure their advisors take appropriate courses and know about every fund on the shelf. There also are product restrictions based on National Instrument 81-102: Investment Funds and due-diligence
rules to follow.
Shelf design and maintenance can be
tricky, says Richard Rizi, senior director, investment services, with Worldsource, which offers 35 ETFs. Adding even one ETF to the shelf requires due diligence to meet KYP requirements. Rizi says the firm priori- tizes portfolio diversity and focuses on ETFs for which “there isn’t an equivalent mutual fund at the same price point.”
2020 and beyond
The MFDA acknowledges the growing sig- nificance of ETFs. An email to IE from the MFDA states: “ETF assets under adminis- tration have almost tripled over last year, [although they] represent a small portion of [MFDA] membership assets.”
Interest in ETFs is growing among advis- ors, Frances says. Even advisors who don’t yet sell ETFs at Peak “took an [ETF] course because they want to be able to speak about them. I thought that was very telling regard- ing how advisors are changing their habits.”
Christina Ashmore, managing director of the Mississauga-based IFSE Institute — a course provider deemed suitable by the MFDA in its 2017 policy bulletin — confirms that interest in her institute’s ETF course is growing. Whether ETFs are accessed directly or through mutual fund wraps, she says, ETFs are a “staple” that advisors need to learn about.
Hawkins is less optimistic about MFDA firms, but says those that “push the boundaries” are more likely to sur- vive. He also points out the future of the MFDA is up in the air: the CSA has stated it will publish a consultation paper this year reviewing self-regulatory organization’s structures, including that of the MFDA.
Says Latimer: “All of the firms I’m fam- iliar with are in the process of working through [their ETF] concerns.”
Kent knows that firms looking to adopt ETFs may face an uphill battle, but says, “[It’s about] aligning ourselves with cli- ents.” If adding ETFs means offering low- cost, transparent and simple products from reputable suppliers, he says, “That, to me, is a slam dunk.” IE
   Firms face barriers to ETF market
Mutual fund dealers would like to join the ETF world, but hurdles abound
more than five years have passed
since Burlington, Ont.-based Mandeville Wealth Services Inc. became the first Mutual Fund Dealers Association of Canada (MFDA) firm to allow its financial advisors to sell ETFs. Shortly thereafter, the Canadian Securities Administrators (CSA) approved the MFDA’s ETF profi- ciency policy for the latter’s members.
That seemed the beginning of a trend — a wave of MFDA-member firms would see their advisors embrace ETFs, products that once were the purview of Investment Industry Regulatory Organization of Canada (IIROC) firms.
Since then, few MFDA-member firms have made the leap, and none of Canada’s big banks yet allow their MFDA-registered advisors to sell ETFs directly.
Montreal-based Peak Financial Group was the second MFDA firm to enter the ETF space in 2016, and has since granted access to platform-traded funds to its clients. The list of more recent entrants is short: it includes dealers such as Mississauga, Ont.-based Carte Wealth Management Inc. (spring 2018), Markham, Ont.-based Worldsource Financial Management Inc. (summer 2019) and Calgary-based Portfolio Strategies Corp. (autumn 2019).
Mandeville Wealth Services, formerly an MFDA subsidiary of Burlington, Ont.-based Mandeville Holdings Inc., offered a suite of 60 ETFs from 2014 until 2016 by leveraging its parent company’s IIROC arm. (Mandeville Holdings has since closed its MFDA busi- ness to focus on its IIROC business.)
Offering ETFs was meant to “expand horizons for our [MFDA] advisors,” says Ray Sawicki, senior vice president and chief investment officer with Mandeville Private Client Inc. ETF sales improved client service and also helped advisors deal with the fee compression trend.
Back in 2014, the ETF landscape was simpler. By the end of that year, there were only 346 ETFs listed in Canada, accounting for $76 billion in assets under administra- tion (AUA). Five years later (as of Nov. 30, 2019), there were 828 ETFs and AUA had surpassed $200 billion for the first time.
The Canadian ETF Association fore- saw potential for MFDA firms five years
ago. However, “we were quickly slapped in the face and woken up to their operational inefficiencies; to [the firms’] inability to sell ETFs and clear trades, and process the [ETFs] on their platforms,” says Steve Hawkins, chair of the association as well as president and CEO of Toronto-based Horizons ETFs Management (Canada) Inc.
Sawicki acknowledges that MFDA firms may not have the capacity to han- dle the demands of an ETF business. “You [need] the infrastructure to deal with those second-by-second and minute-by- minute issues,” he says. “A typical MFDA brokerage may not have those capabil- ities. The barriers would be formidable.” Nonetheless, “the advantages and benefits to get involved in ETFs remain solid.”
Robert Frances, chair and CEO of Peak, agrees. Adding ETF access at his company’s MFDA arm, Peak Investment Services Inc., changed the firm’s culture. “[Our advis- ors] became more competitive, and are no longer at risk of losing a client,” he says. “[Selling ETFs] has led to more assets com- ing in. It’s been a huge plus.”
Executives at newer entrants into the ETF market are optimistic. “We got a lot of really positive emails from advisors” when they found out ETFs were joining the prod- uct shelf, says Mark Kent, president and CEO of Portfolio Strategies. “They said, ‘My cli- ents have been waiting for this for a while’.”
Portfolio Strategies now offers more than 100 ETFs with back-office support from Toronto-based Vexo Technology Solutions Corp., which partnered with Toronto-based Justwealth Financial Inc., the online trading platform, in 2017 to develop an ETF platform for MFDA firms.
Expanding that shelf wasn’t easy, Kent says. “The MFDA hasn’t done enough to support firms.”
An email to Investment Executive (IE) from the MFDA states: “Since 2014, we have assisted several members in success- fully implementing ETF solutions, and we continue to encourage proactive discus- sion with members so that we can help them implement any operational chan- ges related to ETFs.”
compliance challenges
Matthew Latimer, executive director of the Federation of Mutual Fund Dealers,
   “Firms are seeking regulatory certainty regarding best execution and compliant practices”

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