What will it take to broaden alternatives adoption in Canada?

“The risk management or product committee at a dealer firm are the bouncers who decide which funds get on into the club (aka their dealer network),” says Desai (pictured above, left). “Unfortunately, the due diligence checklists and processes they use typically favour larger established fund manufacturers and plain vanilla types of investment offerings. Often the committee’s focus is on minimizing enterprise risk.”

According to Desai, innovative funds or funds issued by niche manufacturers are likely to run up against two obstacles. First, if the dealer has an equivalent on their shelf, either proprietary or from a larger manufacturer, there’s no incentive for them to entertain another offering that is perceived to be similar. 

“The second and greater challenge,” Desai says, “is that dealers are getting awfully sensitive about reputational risk. They tend to favour funds issued by large established manufacturers, even if deeper due diligence reveals these funds aren’t the best or most cost-competitive. If a fund fails, there can be significantly greater backlash if the manufacturer is not a well-recognized household name.

“For many advisors, that raises the appeal of having their own firm,” he adds. “They can decide on their level of risk. They can make recommendations as long as they understand the alternative product. But as long as they’re part of a firm, the head of the risk management or the product committee gets to decide.”

For its part, AIMA Canada is continuing to push for greater adoption of alternatives by engaging with regulators and key dealers. Claire Van Wyk-Allan, managing director and head of Canada at AIMA, says the association consistently meets with members of the Canadian Securities Administrators (CSA), the Investment Industry Regulatory Organization of Canada (IIROC), and the Mutual Fund Dealers Association of Canada (MFDA).