Industry Spotlight -- The Wholesaler (Part 2)

Last blog post, we introduced you to the wholesaler. It is a job in the financial services industry you never hear about but may play a significant role in the mutual fund you invest in. To review, in order to get financial advisors to carry their investment products, mutual fund firms employ “wholesalers,” whose job it is to persuade advisors to understand why their funds are better than the rest of the industry.

In this entry, we're going to further explore some dynamics in the wholesaler-financial advisor relationship.

Now, it would be a great to think that an advisor uses their analytical prowess to decipher the mutual fund that is going to beat the index year after year. However, such prowess, particularly for the larger funds and more prevalent asset classes (for example, a Canadian equity fund), is not significantly different from one mutual fund company to another. With this in mind, the advisor's assessment of giving a mutual fund firm his or her client's business shifts to more subjective traits. One of those traits is their relationship with their wholesaler [another can be the trailer fee, which we'll discuss another time].

In essence, the wholesaler-financial advisor relationship is much like the relationship between a financial advisor and their client. Like financial advisors, wholesalers earn a commission (8 to 12 basis points, we've been told, of the assets they are responsible for bringing under management), while earning a salary as well. Like financial advisors, wholesalers are responsible for recruiting their clients (in their case, the financial advisors) and nurturing them.

It is important to note that wholesalers are given what are called expense accounts (according to several sources, a typical expense account can range anywhere from $20,000 to $50,000 for a geographic area depending on the firm) to, among other things, entice advisors to carry their products. These incentives could be, for example, tickets to shows, sporting events or dining out. In the past, such incentives were out of control with all-expense paid trips and more lavish attempts to win a broker's loyalty. Fortunately, much of this has toned down in the last few years. That being said, a financial advisor's loyalty can still be won in such ways. In fact, in many cases, it is the advisor who has come to expect special treatment in return for them investing millions of their clients' money with a specific firm.

Now, yes, all is fair in love and war, but when you think about it, there can be about 20 wholesalers for the typical mutual fund company (maybe four wholesalers assigned to Ontario, for example). And these five figure expense accounts per wholesaler would be more beneficial to the Canadian client lowering the fund's MER. Of course persuading advisors to carry their products is important, but eliminate or reduce the expense accounts, I say. Let a financial advisor pick a mutual fund on the merits of the fund alone. Let the wholesaler's job be solely to preach the merits of their fund.

The feeling is, though, this is not the start of a groundbreaking movement.