An Exploration of Mutual Fund-Related Sharing Options · An Exploration of Mutual Fund-Related...

An Exploration of Mutual Fund-Related Sharing Options

Final Report

By Catherine Moser

This report was prepared for the Canadian Council for International Co-operation (CCIC) andthe United Way of Canada - Centraide with the financial support of the J.W. McConnell FamilyFoundation.

It first appeared in 1998, and is published as a companion reference to the publication MutualInterest: Options for Cause-Related Marketing with the Mutual Fund Industry. These documentsare intended to assist voluntary sector organizations in exploring return-sharing options with themutual fund industry as a possible means of revenue diversification.

These companion documents may be found in electronic form on the CCIC Web site(www.ccic.ca) and on the Web site of the United Way of Canada (www.unitedway.ca).

© Copyright 2001Canadian Council for International Co-operation and the United Way of Canada -Centraide

Additional copies of this report, and Mutual Interest, may be ordered from CCIC at:

1 Nicholas Street, Suite 300Ottawa, OntarioK1N 7B7Tel: (613) 241-7007 ext. 300 (Publications Unit)Fax: (613) 241-5302

http://www.ccic.ca/

http://www.unitedway.ca)/

Moser: An Exploration of Mutual Fund-Related Sharing Options

TABLES OF CONTENT

EXECUTIVE SUMMARY .......................................................................................................... 1

1.0 INTRODUCTION................................................................................................................... 31.1 OBJECTIVES ......................................................................................................................................... 31.2 RESEARCH METHODOLOGY................................................................................................................. 3

2.0 SHARING OPTIONS DEFINED.......................................................................................... 52.1 SHARED RETURN FUND ....................................................................................................................... 52.2 RETURN SHARING OPTION .................................................................................................................. 72.3 MANAGEMENT FEE SHARING.............................................................................................................. 92.4 TRAILER FEE SHARING...................................................................................................................... 112.5 AFFINITY SALES ................................................................................................................................ 132.6 PRIMARY RESEARCH: FIVE MUTUAL FUND- RELATED SHARING CONCEPTS................................... 15

3.0 PARTNERING...................................................................................................................... 163.1 SOCIAL AND ENVIRONMENTAL SCREENING...................................................................................... 173.2 ESTABLISHING PARTNERSHIP............................................................................................................ 18

4.0 OPINIONS OF MUTUAL FUND COMPANY EXECUTIVES ...................................... 204.1 RESEARCH OBJECTIVES AND METHODOLOGY .................................................................................. 204.2 RESEARCH FINDINGS......................................................................................................................... 204.3 CONCLUSIONS AND RECOMMENDATIONS ......................................................................................... 23

REFERENCES............................................................................................................................... i

APPENDIX 1: THUMB-NAIL DESCRIPTIONS ..................................................................... ii


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EXECUTIVE SUMMARY

Over the past twenty years, Canada’s mutual fund industry has experienced vibrantgrowth in assets, consumer awareness and acceptance, and product and serviceproviders. The industry outlook for double-digit annual growth in mutual fund assets isvery favourable given our ageing population, heightened consumer sophistication andchanging consumer preferences. Since mutual funds tend to be a long-term investment,a mutual fund-related sharing program could produce a stable, low-cost income streamfor charities.

Phase I of this feasibility study focussed on the Shared Return Fund concept and foundthat the DEVCAP model currently is not well-suited to the Canadian marketplace. TheDEVCAP Shared Return Fund, designed to appeal to socially-responsible andalternative investors, has low profitability potential in Canada in the near-term due to:• Small size of the market for socially-responsible and alternative investments

compared to the US;• Canadians’ propensity to make charitable donations; and• High start-up and operating costs associated with Canadian mutual funds.

While the DEVCAP model may not be suitable for our market now, there may be othermutual fund-related sharing concepts that can be demonstrated to be viable in Canada.The purpose of this report is to present five mutual fund-related “Sharing Options”:1. Shared Return Fund2. Return Sharing Option3. Management Fee Sharing4. Trailer Fee Sharing5. Affinity Sales.

Opinions on these five “Sharing Options” were gathered from a small sample of keymutual fund industry executives and industry-related experts. The following conclusionsand recommendations flow out of the research findings:

1. It is important to clearly differentiate cause-related marketing from charitable givingor sponsorships in any proposal for partnership involving one or more of the fivemutual fund-related sharing concepts.

2. It is important to recognise the overlap between Corporate Affairs and Marketingwhen it comes to cause-related marketing. Research both a company’s charitablegiving strategy as well as its business strategy. Build a proposal that fits bothstrategies. Involve both Corporate Affairs and Marketing in the process.

3. Mutual fund companies do not perceive themselves as having excess profits thatthey should be using for social betterment. They believe that they are already givinggenerously to charity. However, they will listen to proposals that serve their businessneeds, such as: enhanced image, new clients, and improved client retention. To gaina company’s interest and attention, the charitable sector must be able to


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demonstrate clearly how the company’s business needs can be met throughpartnership.

4. A proposal for a partnership that can easily fit with a mutual fund company’s existingsystems and approaches has a higher probability of support than one which thecompany perceives as difficult to assimilate or as requiring significant resources toaccommodate.

5. The mutual fund industry is highly competitive. As such, a program which is uniqueto one company will be more attractive to that company as means by which it candifferentiate itself in the marketplace. Be prepared to offer a mutual fund companypartner exclusivity.

Each of the Sharing Options involves partnering, either with other charitableorganisations or financial institution, or both. A successful partnership requires the rightpartner and the right relationship. From a charitable organisation’s perspective, one ofthe most important criteria in choosing a financial institution partner, is that an ethical fitexists between partners. Selection of the right financial institution partner may befacilitated by the application of social screens. The report discusses social andenvironmental screening, and presents Michael Jantzi’s rating criteria. In addition,Manifest Communications Inc., a Toronto-based firm with expertise in social marketing,is the source of:

• other criteria to be considered when trying to identify the right partner and the rightrelationship;

• steps involved in the partnering process; and• guidelines for establishing partnership.

To attract a financial institution partner, NGOs must be able to demonstrate marketinterest and quantify market potential. As well, it would be useful to know how the profileof mutual fund investors compares to that of donors to charitable organisations.

Overall, Canadian corporations are much more predisposed towards domestic charitiesthan those that are internationally-engaged. Most corporations donate to charitiesserving communities in which they do business. International development NGOs willneed to devise a strategy that overcomes the traditional focus of corporate donations.


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1.0 INTRODUCTION

Conceptually, the Canadian mutual fund industry offers numerous opportunities for thecharitable sector to raise capital for program funding using a variety of structures. One suchstructure was the focus of investigation of the first phase of this feasibility study. Phase I took adetailed look at the Shared Return Fund models which exist in France and the United States,and assessed the market potential for a Shared Return Fund in Canada. One of the conclusionsderived from the initial study is that a “Return Sharing” concept may be better suited to ourrelatively small, heterogeneous Canadian market than either of the existing Shared Return Fundmodels.

The purpose of this report is to look more closely at five mutual fund-related “Sharing Options”:1. Shared Return Fund2. Return Sharing Option3. Management Fee Sharing4. Trailer Fee Sharing5. Affinity Sales.Each of these concepts is defined in the next section of this report.

1.1 OBJECTIVES

The objectives of this study were to:1. Define each of the five mutual fund-related “Sharing Options” listed above and identify

issues relating to the design, marketing, promotion, distribution, administration, regulatoryrequirements, and NGO management involvement for each.

2. Explore initial feasibility and test the interest of three to four leading Canadian mutual fundcompanies employing various distribution channels.

3. Identify resources and process precedents relating to the following issues which may beuseful in later stages of research and product development:

• Partnering: Identify individuals/organisations who are capable of:A. defining sponsorship screens; andB. researching companies and applying sponsorship screens.

• Marketing: Identify individuals/firms with expertise in marketing and/or marketingresearch for mutual fund companies.

• Regulatory: Identify individuals/firms with expertise in: regulatory requirements formutual funds, taxation, and tax reporting.

1.2 RESEARCH METHODOLOGY

The research methodology for Phase II, Part I of the feasibility study included thefollowing:1. Develop a thumb-nail description of each of the five “Mutual Fund-Related Sharing Options”

identified above based on the findings of Phase I of this feasibility study and notes frominterviews with industry leaders which followed.


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2. Contact and interview (using thumb-nail descriptions as a focus for discussion) anappropriate senior executive of three to four of the following leading Canadian mutual fundcompanies:• Altamira (formerly: direct sales only)• Investors Group (formerly: exclusive sales force)• Royal Bank/Royal Trust (bank affiliated, no-load)• Trimark/Mackenzie Financial (strong reliance on broker/dealer network)

3. Contact and conduct interviews with identified resource people/organisations:• Partnering: Organisations acting as facilitators or brokers (Manifest Communications;

Michael Jantzi Research Associates Inc.; charities with relevant experience)• Marketing/Market Research: Marketing Solutions, Angus Reid Group (market research);• Regulatory: Contact the following organisations/bodies and compile a list of people with

expertise in regulatory requirements for mutual funds, taxation, and tax reporting:• Government – Ontario Securities Commission, Revenue Canada• Mutual Fund SRO – Investment Funds Institute of Canada• Arthur Drache (Financial Post contributor on personal financial planning and editor

of Canadian Not-For-Profit News)


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2.0 SHARING OPTIONS DEFINED

In this section, the five mutual fund-related “Sharing Options” are described broadly interms of: concept, structure, marketing, promotion, distribution, administration,regulatory requirements and management involvement.

Before the “Sharing Options” are presented, it may be useful to consider the primarydistribution channels for mutual funds that are prevalent in Canada today:

1. Independent Brokers/Dealers – A mutual fund company distributes its funds to thepublic through a network of independent brokers, dealers and financial planners.AGF, Mackenzie, and Trimark are examples of mutual fund companies using thebroker/dealer network.

2. Representative Employees – Mutual-fund licensed employees of a bank or mutualfund company sells directly to the public. Altamira and Royal Bank are examples ofthis distribution method.

2.1 SHARED RETURN FUND

Concept

Based on the DEVCAP1 Shared Return Fund (SRF) model, a Shared Return Fund is anopen-end investment fund, which gives its unit holders the opportunity to donate all or aportion of the fund’s annual distributions to a charitable organisation. “Annualdistributions” is defined as: the amount of investment income earned by the fund duringthe year which is passed on to unit holders in the form of a distribution.

Structure

A Shared Return Fund, an open-end investment fund, would allow investors to maketax-deductible charitable donations of 50, 75 or 100 percent of their annual return tonon-governmental organisations (NGOs).

The DEVCAP Shared Return Fund’s investment portfolio contains socially-screenedcompanies and its composition is intended to mirror the Domini 400 Social Index. Theamount of charitable donations in any given year is highly dependent on the mutualfund’s return for that year. Charitable donations are shared equally among the fourNGOs comprising DEVCAP, although proportional distribution is another possibility. 1 DEVCAP, a consortium of four non-government organisations, is comprised of: Appropriate Technology

International, Catholic Relief Services, Save the Children, and Seed Capital Development Fund (SCDF). SCDF isaffiliated with France’s Société d’investissement et de développement international (SIDI) and Comité Catholiquecontre la Faim et pour le Développement (CCFD). SIDI created the Hunger and Development Fund on December5, 1983. Since its inception on October 16, 1995, DEVCAP SRF grew to just over US$6 million as of November 30,1997. Its average initial investment is approximately US$3,000.


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Market Positioning

As a niche product, clearly defined and well-understood target markets must beidentified prior to constructing a Shared Return Fund. Using DEVCAP again as anexample, DEVCAP’s SRF carved out a unique niche. The findings of its marketresearch identified the needs of four distinct target markets:• Current donors to member organisations• Socially-responsible investors• Religious lay investors• Religious institutional investors

In response to their needs, DEVCAP’s SRF combines the interests of sociallyresponsible and alternative investors by using the Domini Social Index Portfolio,2 as theunderlying mutual fund investment. In addition, the risk management needs ofalternative investors are met in that since the Portfolio invests only in US securities, theprincipal is not subject to exchange-rate risk and donated funds are channelled to thedeveloping world.

Promotion

A Shared Return Fund requires a consistent, multi-faceted approach to promotion.Again, looking at DEVCAP as an example, their market study determined that distinctmarket segments exist, requiring different marketing approaches. Inserts in mailings tocurrent donors to member organisations have been the most successful type ofpromotion, accounting for 60 per cent of assets. DEVCAP found the advertising wasexpensive and produced little results. The marketing plan for 1997 focused morevigorously on the institutional market, particularly religious institutions – a segment thathas proven to be receptive to the Shared Return Fund concept. As large investors,institutions can help drive down the fund’s expense ratio.

Early on, DEVCAP’s website (http://www.devcap.org) came on-line. Mail, e-mail andtelephone inquiries are followed-up with an attractive and informative mail package.Global Dividends, a quarterly newsletter is sent to investors, describing results ofprograms funded by DEVCAP member organisations as well as the Shared ReturnFund’s investment performance.

The DEVCAP SRF was launched on October 16, 1995. A marketing budget ofUS$147,000 and US$343,000 was established for 1995 and 1996, respectively.

Distribution and Administration

A Shared Return Fund requires the expertise and systems of an established broker-dealer. The DEVCAP SRF contracted with Signature Broker-Dealer Services, Inc. to act 2 DEVCAP’s selection of Amy Domini, of Kinder, Lyndenberg, Domini & Co, Inc., as investment advisor capitalised

on Ms. Domini’s reputation and expertise in socially-responsible investing, as well as the successful track record ofthe Domini Social Index which historically has out-performed the S&P 500.

http://www.devcap.org/


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as agent in connection with the offering of Fund shares in exchange for an annual fee ofup to 0.25 per cent of the Fund’s daily net assets. The same company performsadministrative services, such as record keeping and preparation and filing of alldocuments required by applicable laws and regulations, in exchange for 0.15 per cent ofthe first $100 million of the Fund’s daily net assets.

Regulatory Requirements

In Canada, as a security distributed by investment dealers and financial advisors, aShared Return Fund would fall under provincial securities law. Mutual fund disclosurerequirements are contained in National Policy Statement 36 of the Ontario SecuritiesAct and all other aspects of mutual fund regulation are covered in National PolicyStatement 39.

The Income Tax Act applies to the tax treatment of charitable donations.

NGO Management Involvement

Assume that DEVCAP’s Shared Return Fund model is adapted to suit the Canadianmarket. From the perspective of a charitable organisation, a huge commitment ofmanagement resources as well as substantial financial resources (start-up and seedcapital) are involved in the development and launch of a new mutual fund. Partneringwith other charitable organisations, selecting and contracting with financial institutionservice providers, development and implementation of marketing strategy are amongthe key management activities involved in developing a new mutual fund. In terms offinancial resources, start-up capital to cover the cost of developing and launching thefund as well as seed capital, a sum of money invested in the new mutual fund on thedate of its inception, can easily amount to half a million dollars or more.

Following the launch, a charitable organisation’s management would be involved in:

• maintaining relationships with partners;

• corporate governance;

• sharing donor lists; and• providing additional financial support until the Fund breaks even, unless

development capital required is raised separately. Based on DEVCAP’s experience,the payback period could be five years.

2.2 RETURN SHARING OPTION

Concept

The option of donating all or a portion of annual distributions is added to an existingmutual fund or family of mutual funds.


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Structure

For many years, mutual funds have offered investors several options for recurringtransactions, such as: automatic reinvestment of distributions, automatic purchase plansand automatic withdrawal plans. A Return Sharing Plan is an example of another optionthat could be offered to investors. In comparison to creating a new mutual fund, addingthis option would be relatively easy to add to a single mutual fund or to each mutualfund in a family of funds.

Investors could choose to donate between zero and 100 per cent of their fund’s annualdistributions and could select which charitable organisation(s) will receive their donationfrom among a number of charitable organisation partners. There are various models forsharing:

• Single Charity – One charity partners with one mutual fund company. The investorhas one charity from which to choose.

• Umbrella – An umbrella of charities partners with one mutual fund company. Theinvestor donates to an umbrella organisation which allocates donations among itsmembers.

• Investor Choice – A number of charities partner with one mutual fund company andthe investor decides which charity will receive her/his donation.

Investors could select the Return Sharing option at any time or change it at a later date.

As with a Shared Return Fund, the dollar amount of donations received by a charitableorganisation is affected by the mutual fund’s annual return.

Market Positioning

As with the Shared Return Fund, market research would help identify specific marketsegments that would be most likely to respond favourably to this investment option.Examples of market segments that might have high potential include:• current mutual fund investors;• current donors to member charitable organisations;• socially-responsible investors;• religious lay investors; and• religious institutional investors.

Once again, as with the Shared Return Fund, due to the likely differences betweenthese market segments, specific marketing approaches would be developed for eachmarket segment.


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Promotion

Borrowing from DEVCAP’s experience, inserts in mailings to the sponsoring mutualfund’s current investors and mailings to current donors to member charities may provehighly successful in this case. Multiple marketing programs will likely be appropriate. Inaddition to promoting this new charitable giving option among current and potentialinvestors, the mutual fund company’s salespeople and customer service staff in themutual fund company’s distribution system must be won over.


The mutual fund company’s existing distribution channels and administration systemswould be utilised, though relatively small modifications would be required.


The mutual fund company would be required to obtain the approval of provincialsecurities regulators for this new option, probably at the time of the fund’s annualprospectus filing. As with a Shared Return Fund, tax treatment of charitable donations isdefined by the Income Tax Act.


From the perspective of a charitable organisation, management would be involved inpartnering with other charities as well as a mutual fund company. Selection of a mutualfund partner that fits well with a charitable organisation’s mission and values will be asignificant undertaking, as will be the negotiation and development of a comprehensivepartnership agreement that meets the needs of the mutual fund company and itscharitable organisation partners.

Following the launch of this new charitable giving option, management will be involvedin maintaining partnerships, corporate governance, as well as in the sharing of donorlists with the mutual fund company or allowing the mutual fund company to piggybackon mailings to the charities’ donors.

2.3 MANAGEMENT FEE SHARING

Concept

A mutual fund company partners with one or more charitable organisations anddesignates a portion of its management fee to be paid to the charity or charities.


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Structure

A U.S.-based model of this concept exists which raises money for non-profitorganisations at no cost to investors or the mutual fund. Through its program calledVOICE (Vision for Ongoing Investment in Charity and Education), Vintage Funds, anIndianapolis mutual fund company, shares its management fee with the charitablesector. Investors in any of Vintage’s mutual funds can designate a charitable recipient.Vintage donates 0.25 per cent of the investor’s net asset value each year. Vintagemakes the donation out of its management fee of 0.75 per cent. With this structure, thegift neither reduces the unit holder’s profits, nor earns the unit holder a charitablededuction. Donors can designate any group that is classified as a charity by the InternalRevenue Service. (The VOICE model could be modified to restrict the universe ofcharities that are beneficiaries under a management fee-based sharing program.)

A minimum investment value of $25,000 over an entire quarter is required to qualify forVOICE gifts, which are paid to charities on a quarterly basis. A $25,000 average annualinvestment value would earn the unit holder’s designated charity $62.50 per year, at arate of $15.63 per quarter. A $1,000,000 investment would result in an annual charitablegift of $2,500 or $625 per quarter.3

Along with the quarterly contribution cheque mailed to the non-profit organisation,Vintage includes a Participant List containing the names of individual contributors onwhose behalf the contributions are being made, unless anonymity is preferred. The unitholder chooses the name in which the contribution is made. The amount of individualcontributions does not appear on the Participant List. These policies help protectindividual privacy.

On the account application form, the investor chooses the institutions and percentage ofthe total contribution that each will receive. Changes in designations are permitted twiceeach year, in January and July.

Since Vintage reduces its own income to support non-profit organisations, Fund assetsare not affected. Therefore, VOICE contributions have no impact on the Fund’sexpenses, yield or performance. However, changes in market value of the Fund’sinvestments do affect the amount gifted through the VOICE program.

A contractual agreement exists between each Vintage Fund and Vintage Advisorswhich obligates Vintage Advisors to make quarterly payments as specified by theVOICE program. Failure to comply would result in termination of Vintage Advisors’advisory agreement with the Fund.

Market Positioning

The Vintage model is constructed to appeal to investors with an above-average accountsize. Vintage hopes to attract big institutional investors and others, such as utilities

3 As of early January 1998, net assets of the four Vintage mutual funds totalled $60.4 million. The VOICE program

has raised $21,000 in the 18 months.


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companies, which may have difficulty defending donations made with money raisedfrom ratepayers and subtracted from dividends. The VOICE program helps Vintage todifferentiate itself in the crowded field of investment management companies.

Promotion

Unit holders receive confirmation from Vintage Advisors specifying the amount andrecipient of the charitable gift, along with an acknowledgement thanking the unit holderfor participating in the VOICE program.

At the end of the initial year of contributions to a non-profit organisation, VintageAdvisors gives the non-profit an attractively-designed Master Participant Registercontaining VOICE participants’ names. The Register may be displayed publicly at thediscretion of the non-profit. New Program participants are added annually to theRegister, chronologically by date of the first VOICE application.


As with the Return Sharing Option, distribution of the underlying investment andadministration of the program are performed by the mutual fund partner.


Some type of disclosure of a management-fee sharing program would likely be requiredin the mutual fund’s prospectus.

A management fee-sharing program based on the VOICE model, in which donationsare made by the mutual fund company from its own income, results in a charitable taxbenefit to the company. Revenue Canada and corporate tax experts should beconsulted for information on how such an arrangement would be treated for taxpurposes in Canada.


Refer to “NGO Management Involvement” in Section 2.2 for a general description ofactivities.

2.4 TRAILER FEE SHARING

Concept

A broker-dealer partners with one or more charitable organisations and donates aportion of trailer fees earned on their clients’ mutual fund assets to these charities.


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Structure

Mutual fund companies using broker-dealers as their distribution network pay aquarterly trailer fee to each broker-dealer. CIBC Wood Gundy is an example of abroker-dealer. Typically, the trailer fee is a fixed percentage of the average asset value

of their clients’ mutual fund accounts, calculated and paid out to broker-dealers on aquarterly basis. Equity funds pay the highest trailer fees and money market funds paythe least.

It is common industry practice for the broker-dealer to keep part of the quarterly trailerfees that it receives from a mutual fund company, and pay the remainder to theadvisor/salesperson who is responsible for providing ongoing service to theaccountholder/investor. This division of trailer fees suggests two opportunities for “trailerfee sharing”:

• by the broker-dealer; and

• by the broker-dealer’s advisor/salesperson.

Assume that a mutual fund pays an annual trailer fee of 1 per cent on an equity mutualfund and that the broker-dealer splits this trailer fee 50:50 with its salespeople. Thebroker-dealer and/or its sales people could choose to donate all or a portion of theirtrailer fee income to charity. As an alternative, the broker-dealer might choose to matchthe donations of its salespeople.

Assume a broker-dealer has $1 billion in equity mutual funds on which it receives a 1per cent annual trailer fee. Each quarter, the broker-dealer would receive $2.5 million.Assuming a 50:50 split with its salespeople, the broker-dealer retains $1.25 million andallocates the other $1.25 million to salespeople. If the broker-dealer donated just 1 percent of its $1.25 million, its charitable organisation partners would receive $12,500 eachquarter, a total of $50,000 annually. If the broker-dealer’s salespeople participated tothe same degree, this “trailer fee sharing” arrangement would generate $100,000annually for charitable programming.

Market Positioning

Nearly 50 per cent of mutual fund assets under administration in Canada (i.e.approximately $140 billion out of $280 billion) are invested in mutual funds that aredistributed through the broker-dealer network. There are over 100 broker-dealers whoare members of the Investment Funds Institute of Canada.4 By establishing a trailer fee-sharing program to benefit one or more charities, a broker-dealer can differentiate itselffrom its competitors.

4 Investment Funds Institute of Canada Statistics as at November 30, 1998.


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Promotion

The broker-dealer and charitable organisation partners would promote the trailer fee-sharing program to salespeople, mutual fund investors, current donors to charitableorganisations partners, and to potential clients.


The broker-dealer would administer the program.


Expert legal and tax opinions on the establishment of a trailer fee-sharing programshould be sought.


Refer to “NGO Management Involvement” of Section 2.2.

2.5 AFFINITY SALES

Concept

A direct-sales mutual fund company or broker-dealer partners with charitableorganisation(s) and pays a trailer fee (or makes a donation) to the charitableorganisation based on mutual fund sales and/or assets generated from mailing listssupplied by its charitable organisation partners.

Structure

The Affinity Group Inc.’s partnership with the University of Toronto is a local model forthe affinity sales. Affinity Group is an independent mutual fund dealer registered inOntario which offers retail investors in this province mutual funds from several leadingCanadian companies, such as Trimark, Mackenzie and Templeton.

The Affinity Group is interested in large or small databases of very loyal, wealthymembers. They evaluate the potential of an organisation’s list using a number of filtersincluding size, average income (and other demographics), loyalty, reputation, and fitwithin their current portfolio of partners. The specific offer Affinity makes to a potentialpartner is dependent upon the results of this evaluation.

Affinity’s partner list includes: University of Toronto, Ryerson, Queen’s and YorkUniversities, DUCA – a credit union, and American Express Canada. By the 1999RRSP season, Affinity’s goal is to add special interest groups, professionalorganisations and corporations to its roster of partners.


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Market Positioning

Using affinity marketing, a customised mutual fund offering is made to people with acommon interest by marketing through exclusive arrangements at membershiporganisations. The Affinity Group’s target market comprises those who are well-educated and between ages 25 and 40. As well, they look to their partners’ databasesfor later-stage baby boomers.

The Affinity Group offers investors sound advice without having to pay commissions thatother broker-dealers do. The firm’s revenues are generated from the trailer fees paid onthe mutual fund assets under their administration.5

Promotion

In addition to its website, Affinity relies on direct mail programs to its affinity partners togenerate sales.


Licensed only in Ontario, the Affinity Group can sell funds only in Ontario. They aremaking license applications in the other Canadian provinces and hope to be in theposition to offer a national program and an expanded product line in the second half of1998.


See Section 2.4 Trailer Fee Sharing, “Regulatory Requirements”.


Refer to “ NGO Management Involvement” under Section 2.2.

Potential Partnerships with Affinity Group

To evaluate the potential of an organisation’s list, Affinity would request that thefollowing information be supplied by the organisation:

1. Total size of membership (database)2. % breakdown of membership (provincially)3. Some indication of activity rate (e.g. % of actual members who donate yearly)4. Any demographics (age, income, stage of life, etc.)5. Methods available for co-operative marketing (eg. inserts, websites, direct mail lists,

seminars, events, print, radio)

5 Clients incur a $45 initial set-up fee, a $50 Self-Directed RRSP Account set-up fee, and a $100 Self-Directed RRSPAccount transfer-out fee which appears to compare favourably with their competitors. Source: http:www.affinity.ca


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Affinity Group Inc. would feed this information into its economic model and use theresults to formulate an offer to the potential partner.

2.6 PRIMARY RESEARCH: FIVE MUTUAL FUND- RELATED SHARING CONCEPTS

In early December 1997, an invitation was extended to a small sample of ChiefExecutives of leading Canadian mutual fund companies to provide their opinions on thefive mutual fund-related sharing concepts described above. The sample included: PhilipCunningham, Mackenzie Financial; Robert Hewett, MD Management; Robert Krembil,Trimark; Simon Lewis, Royal Funds; and Sanford Riley, Investors Group. Each of theseindividuals were faxed a briefing document which included a thumb-nail description ofeach of the five mutual fund-related sharing concepts. Appendix 1 contains thumb-naildescriptions of the five sharing concepts.

Opinions on the five sharing concepts were also solicited from:• Arthur Drache, Drache, Burke-Robertson & Buckmayer, Ottawa;• Carla Flamer, Senior Vice-President, Angus Reid Group, Toronto;• Honourable Thomas A. Hockin, President & Chief Executive Officer, The Investment

Funds Institute of Canada, Toronto;• John Kaszel, Director of Academic Affairs and Research, The Investment Funds

Institute of Canada, Toronto;• Dan Richards, Marketing Solutions, Toronto


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3.0 PARTNERING

The development and launch of any of the five mutual fund-related sharing conceptsdiscussed in this paper will involve partnering of one form or another, with othercharitable organisations and/or a financial institution. Since a successful long-termpartnership requires a good fit between partners, selection is critical. Not only doesthere need to be a fit between partners’ goals, mission, values and ethics, a partnershipcreated for social marketing purposes must be perceived as a logical fit from the publicperspective. With regard to ethics, social and environmental screening is a tool thatcould help facilitate selection of the right financial institution partner.

Highly-visible, reputable corporations receive hundreds of requests each year fordonations. Many corporations have established policies, programs and guidelines forhandling such requests. One thing to recognise is that this infrastructure can be asignificant barrier when innovative ideas, such as the mutual fund-related sharingconcepts, are presented to a corporation.

In 1993, corporations contributed just 1 per cent of the revenues of registered charities.According to a survey of Canadians conducted by Angus Reid Group in August 1997,Canadians believe in community support and they believe that corporations are doing agood job (not a “very good job”) of supporting charitable and community causes. Thissurvey also found that Canadians prefer to see corporations supporting organisationsthrough financial donations, product donations and community support activities ratherthan through awards or sponsorships.

Research findings like these are producing an increasing trend toward cause-relatedmarketing and a levelling-off of arts and sports-related sponsorship marketing. At theNational Sponsorship Marketing Conference held in Toronto in November 1997, JohnFerguson, Senior V-P of CIBC, described how the bank is shifting towards strategicphilanthropy, focusing on community issues such as youth unemployment andeconomic development, as a result of recent research. Even though cause-relatedsponsorship is growing, Mark Sarner of Manifest Communications finds thatinternational development is still difficult to sell to corporate decision-makers. Thissuggests that charities in the international development field should search outcompanies with suppliers or customers in developing countries. In terms of selection ofspecific mutual funds or mutual fund families, international funds may be the best fit forsharing programs that benefit an organisation engaged in international development.

To capture the interest of financial institutions in partnering with the charitable sector, anNGO must be able to:• demonstrate public interest in the charity’s objectives;• demonstrate the effectiveness of its charitable programs;• quantify the market potential for mutual fund products that are linked to charitable

giving; and• demonstrate how the relationship will complement the mutual fund company’s long-

term strategy.


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Since corporations do not view cause-related marketing as philanthropy (funding forcause-related marketing programs comes out of marketing budgets), NGO managersneed to use the same bottom-line mentality in developing a cause-related marketingpartnership. Assessing the NGO’s strengths and weaknesses, and understanding justhow the NGO can add value to the corporate partner will increase the probability offinding the right partner and the right relationship. Section 3.2 looks at the process ofestablishing a partnership.

When selecting potential financial institution partners, charitable organisations canchoose between:• companies that offer only ethically-screened mutual funds (e.g. Ethical Funds Inc.);• companies that offer both ethically-screened and non-screened mutual funds (e.g.

Investors Group, Desjardins, Dynamic); and• companies that do not offer ethically-screened mutual funds (e.g. Trimark).

Mutual fund companies which offer ethically-screened funds exclusively or acombination of screened and non-screened funds comprise a relatively small segmentof the Canadian mutual fund industry.

3.1 SOCIAL AND ENVIRONMENTAL SCREENING

Social and environmental screening is one tool that can be very useful in the partnerselection process. A charitable organisation can apply social and environmental screensto help evaluate a potential financial institution partner. The screens also force Boardsand staff to think about social and ethical criteria in the partner selection process,decide, and defend the decision at some point.

For a number of years, Toronto-based Michael Jantzi Research Associates Inc. (MJRA)has been analysing, assessing and profiling the social and environmental performanceof Canadian companies. In its analysis, the firm applies a set of over 100 social andenvironmental rating criteria.6 The areas covered by the MJRA rating criteria include:• Community• Diversity• Employee Relations• Environment• International• Products and Practices• Other – relating to executive compensation and corporate ownership• Exclusionary Screens 6 MJRA has analysed publicly-traded mutual fund companies such as Trimark, Investors Group and MackenzieFinancial. These reports are available at a cost of $40 each. The cost of research reports on privately-heldcompanies ranges from $500 - $1,000 depending on the scope of information required. Although there has beensome interest in reports on specific mutual fund portfolios, particularly ethical funds, this requires significant effort,especially in the case of portfolios in which holdings change frequently.


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• Alcohol/Gaming/Tobacco• Military Weapons• Nuclear Power

A suggested approach to partner selection for charitable organisations to considerwould be as follows:1. Develop partnering criteria. (MJRA criteria may serve as a starting point.)2. Apply the criteria to potential partners.3. Narrow the field.4. Look at specific funds.

3.2 ESTABLISHING PARTNERSHIP

A partnership where the fit and relationship are right can produce very powerful results.Manifest Communications, Inc., a Toronto-based company with expertise in socialmarketing in Canada, devoted a chapter on partnering in their 1996 handbook entitled,Social Marketing for Business: What to Know. What to Do (SMB). Though the handbookis directed at corporations, it provides useful information for non-profits interested inpartnering with a corporation.

For instance, recognising that a corporation will act according to its own agenda,objectives and priorities, a charitable organisation in search of a corporate partnerneeds to learn certain information about a potential partner early on. Doing so can helpnarrow the field before significant resources are expended pursuing unsuitable potentialpartners.

SMB identifies four things that should be investigated before or during the partneringprocess:1. Know each other’s ideology to ensure compatibility.2. Know potential partner’s history to ensure accountability.3. Know what the opportunities are to ensure mutual benefit.4. Know (and spell out ) who is responsible for what to avoid misunderstandings.

SMB identifies five activities involved in establishing partnership:1. Establish guidelines (policies and procedures).2. Research your partner (annual reports, strategies, marketing material, balance

sheets, available studies, comprehensive media search, references).3. Consult with partner to jointly determine program and relationship parameters

(needs, styles, expectations, what each is willing to give).4. Contract. Define the partnership agreement in writing (program, roles,

responsibilities, timelines, money, rights and obligations, expectations, options forrenewal).

5. Manage the relationship through collaboration. Define how partners will worktogether through development, implementation and evaluation of the program.


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When charitable organisations partner with a financial institution, it is important that thedonation allocation framework be defined in the partnership agreement, along with atime frame for the partnership and options for renewal of the partnership.

Diligence in partner selection, structuring and managing the relationship will help reducethe potential risks of partnering with a corporation. Potential risks include:• Wasting resources – A failed venture is a waste of time and effort.• Reduced donations – You risk “cannibalising” other revenue-generating programs

or losing donor support due to for-profit association.• Loss of organisational flexibility should a corporation impose restrictions on you.• Tainted partners – Even though a corporation has a clean slate, it’s impossible to

foresee the future.• Antithetical marketing – A corporation’s marketing tactics may conflict with your

image and strategy.• Too much success – You may generate more funds than you can handle.• Structural atrophy – Keep your marketing skills in shape by continuing to explore

other potential programs and increasing traditional donations to ensure multiple,ongoing sources of revenues.7

Being realistic about what benefits the partnership can provide is equally important.NGOs should:• Identify partnerships and programs which complement and/or advance their mission

and programming objectives.• Be realistic about the human and financial resources that will be necessary to make

the partnership work.• Keep expectations realistic. Don’t overestimate the benefits of the partnership.• View the partnership as one additional income-generating program among many

ongoing programs.• Continue advocacy and education activities to generate increased public

understanding and support of non-traditional income-generating programs.8

7 Andreasen, Alan R. “Profits for Non-Profits: Find a Corporate Partner”, Harvard Business Review, November

December 1996.8 Davis, Lee. The NGO-Business Hybrid: Is the Private Sector the Answer?, The Paul H. Nitze School of Advanced

International Studies Program on Social Change and Development, Johns Hopkins University, 1997.


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4.0 OPINIONS OF MUTUAL FUND COMPANY EXECUTIVES

This section contains the findings from research conducted among a small sample ofleading Canadian mutual fund companies.

4.1 RESEARCH OBJECTIVES AND METHODOLOGY

The objective of this research with mutual fund executives was to explore the initialfeasibility of and level of industry interest in:

• five mutual fund-related sharing concepts developed in the first research phase; and

• the concept of partnering between mutual fund companies and the charitable sector.

The research process involved gathering information concerning the Canadian mutualfund industry and its participants, including detailed information on six companiesrepresenting differing marketing and distribution strategies. A briefing document on thisresearch project was faxed to the CEOs of the six companies, and interviews weresubsequently conducted with three participating executives.

4.2 RESEARCH FINDINGS

The senior marketing executives of Investors Group, Royal Mutual Funds and Trimark,were interviewed in January 1998. The findings from these interviews are as follows:

1. Companies with a charitable giving strategy in place may not be open toconsidering partnering with the charitable sector to develop one or more ofthe return-sharing concepts. One marketing executive was receptive to theconcept of cause-related marketing; however, neither of the other two marketingexecutives saw a fit with their company’s charitable giving strategy. Typically,charitable-giving strategy and administration falls under the responsibilities of a largecorporation’s corporate affairs department. Where this duality exists, charitableorganizations should proceed as follows:• Investigate and understand the corporation’s charitable-giving strategy and

policies.• Develop a proposal that aligns with existing charitable-giving strategy and

policies.• Include senior executives of both corporate affairs and marketing when

developing and pitching a proposal for partnering with a mutual fund company.


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2. Mutual fund marketing executives are receptive to easy-to-set-up and easy- to-administer programs that fit well with existing systems and approaches. Mostmutual fund companies have systems in place to accommodate SystematicWithdrawals (a mutual fund investor specifies periodic payments of a definedamount to be made to a particular payee by redeeming units in the account andissuing a cheque). This existing facility could be used by an investor to give a pre-determined amount to charity on a periodic basis. In the case of a mutual fundcompany which uses a financial planning process to uncover needs, a discussion of“return sharing” could naturally flow out of a conversation about planned giving.Therefore, it is necessary to know the potential financial institution partner’sbusiness strategy, including its business priorities, well enough to propose apartnership that is easily assimilated into existing systems and processes.

3. Mutual fund marketing executives are receptive to cause-related marketingproposals that can be proven to support their business objectives. If it can bedemonstrated that a proposed program will produce new clients, new sales orimprove client retention and is cost-effective, it has a higher probability of beingaccepted. Charitable organisations should be sure to include data that supportsthese objectives when proposing a cause-related marketing program to a mutualfund company.

4. A successful cause-related marketing program is hassle-free and has the buy-in of the front-line. For a program to be successful, it is critical that the distributionchannel is involved in the product development process; and that the program ispromoted to, and has buy-in from, those in front of the customer.

5. A partnership with a mutual fund company involves not only the company, butalso its sales representatives and clients. Generally-speaking, in the financialservices sector, while the client has decision-making power, sales representativeshave considerable influence. Thus, the distribution channel has considerable power.It also has considerable wealth. Charitable organisations need to include all of theseplayers and their interests when thinking of “partnership”.

6. A very powerful cause-related marketing program is one that involves variouslinks in the distribution chain activated by a client’s decision. For example,combining two or more of the return-sharing concepts in one program in which aclient’s decision triggers involvement of the sales rep and mutual fund companywould produce greater results. It’s the “matching” principle applied to mutual fundinvesting.

7. Mutual fund companies are just as interested in the reputation of charitableorganisations when considering a potential partnership as charitableorganisations are in their selection of a mutual fund partner. Even a hint ofscandal or inefficient use of resources will turn a corporation away from partneringwith a charitable organisation. The corporation also wants to know the charity well --what it stands for, who supports it, what results it achieves, how donations will beused. Charities hoping to partner with corporations must have a clearly defined


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mission, programs, quantifiable goals, and demonstrated results. Corporationswould also welcome a profile of the charity’s supporters.

8. With regard to the five mutual fund-related sharing options, mutual fundcompanies consider the following:

• Creating a new fund for the purpose of an investor sharing her/his annual return isnot viable due to the costs involved in launching and operating a mutual fund inCanada.

• Offering return-sharing as an option involves a lot of resources to organise and set-up record-keeping and reporting systems for clients and Revenue Canada. It wouldbe easier for the company to write a cheque for the charity. However, from amarketing perspective, return-sharing is preferable to management-fee sharingbecause of the client involvement in the decision to share returns. Contrary to thisview, since about 60 per cent of mutual fund assets are held in RRSPs, the return-sharing concept doesn’t fit. The mutual fund industry is telling Canadians toaccumulate and “don’t touch it”. Promoting the idea of sharing returns runs contraryto existing messages, except in the case of investors in the latter stage of life whoare in “payout” mode. Potential targets for return sharing are the wealthy and theretired. It may be viable to use a tax-planning approach that results in donating theannual growth on a sum of $100,000, for example. The mutual fund industry is alsopreparing investors to lower their expectations for returns on mutual funds to 8 to 10per cent annually, as the prolonged bull market in North America shifts into aconsolidation phase or even a bear market. It may be more appropriate to link areturn-sharing option to GIC products because they traditionally guarantee principaland interest.

• Management-fee sharing is not considered attractive because of competitivepressures from US mutual fund companies, with very low management fees, comingto Canada. There is increasing pressure to cap or reduce the management fees.Banks have management expense ratios that are higher than the industry average,up to 3 per cent as compared to 1.5 per cent. Therefore, bank-affiliated funds maybe a more appropriate target for management-fee sharing than an independentmutual fund company.

• Trailer-fee sharing is attractive when triggered by a client’s decision. However, trailerfees may one day be a thing of the past if the recommendation to eliminate them isimplemented (reference: Gloria Stromberg’s Report to the Ontario SecuritiesCommission on mutual fund industry practices). Each December, CIBC WoodGundy donates a day’s trading fees to charity. This is a one-off that produces goodresults and is easy to administer.


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4.3 CONCLUSIONS AND RECOMMENDATIONS

1. Cause-related marketing must be clearly differentiated from charitable giving orsponsorships in any proposal for partnership involving one or more of the fivemutual fund-related sharing concepts.

2. It is important to recognise the overlap between Corporate Affairs and Marketingwhen it comes to cause-related marketing. Research both a company’scharitable giving strategy as well as its business strategy. Build a proposal thatfits both strategies. Involve both Corporate Affairs and Marketing in the process.

3. Mutual fund companies do not perceive themselves as having excess profits thatthey should be using for social betterment. They believe that they are alreadygiving generously to charity. However, they will listen to proposals that serve theirbusiness needs, such as enhanced image, new clients, and improved clientretention. To gain a company’s interest and attention, the charitable sector mustbe able to demonstrate clearly how the company’s business needs can be metthrough partnership.

4. A proposal for a partnership that can easily fit with a mutual fund company’sexisting systems and approaches has a higher probability of support than onewhich the company perceives as difficult to assimilate or as requiring significantresources to accommodate.

5. The mutual fund industry is highly competitive. As such, a program which isunique to one company will be more attractive to that company as a means bywhich it can differentiate itself in the marketplace. Be prepared to offer a mutualfund company partner exclusivity.


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REFERENCES

Andreasen, Alan R. “Profits for Non-profits: Find a Corporate Partner”, HarvardBusiness Review, November/December 1996.

Davis, Lee. The NGO-Business Hybrid: Is the Private Sector the Answer?, JohnsHopkins University, 1997.

Greene, Stephen G. “Doing a World of Good”, The Chronicle of Philanthropy, Vol. VIII,No. 19, July 11, 1996.

Moser, Catherine. Shared Return Fund Feasibility Study – Phase 1, February 1997.

Sarner/Nathanson. Social Marketing for Business: What to Know. What to Do. AManifest Communications Handbook. 1996.


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APPENDIX 1: THUMB-NAIL DESCRIPTIONS

1. SHARED RETURNFUND (SRF)

DESCRIPTION

Structure• A charitable organisation or a consortium of charities

creates an open-end mutual fund• Unit holders donate all or a portion of annual

distributions to charitable organisation(s)• Unit holders receive charitable-tax credit for amount of

donation• Underlying security can be an existing mutual fund• Socially-screened investments important to charitable

organisations and socially responsible investors alike• Charities in the consortium share annual donations,

either equally or proportionally• Dollar amount of annual donations affected by mutual

fund’s net realised return

MarketingCreate strong identity within target groups:

- current donors to member organisations - socially responsible investors - religious lay investors - religious institutional investors

Promotion Marketing programs designed specifically for each targetgroup

Distribution Channel(s) utilised by partnering financial institution

Administration Same as other mutual funds, plus record-keeping, incomere-distribution and tax reporting re: charitable donations byunit holders

RegulatoryRequirements

Provincial securities and income tax regulations re: capitalgains and investment income the same as other mutualfunds, plus income tax regulations re: charitable donations

NGO ManagementInvolvement

• Initiate and maintain relationships with partneringfinancial institution and charitable organisations• Managing expectations within charitable organisations• Seed and start-up capital• Sharing donor lists• Corporate governance


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2. RETURN SHARINGOPTION

DESCRIPTION

Structure• Option of donating all or a portion of annual

distributions to one or more charitable organisations isadded to existing mutual fund/family of funds

• Participating unit holder designates charity to receivedonation

• Unit holders receive charitable-tax credit for amount ofdonation

• Values of partnering financial institution important toparticipating charitable organisations

• Participating charities receive the amount designatedby unit holders

• Amount of annual donations affected by mutual fund’snet realised return

MarketingNeed to promote this new charitable giving option withintarget groups:

- current mutual fund investors- current donors to member organisations

- religious lay investors- religious institutional investors

Promotion Marketing programs designed specifically for each targetgroup

Distribution Channel(s) utilised by partnering financial institution

Administration Record-keeping, income re-distribution and tax reportingre: charitable donations by unit holders who choose todonate some/all of annual return


Income tax regulations re: charitable donations


• Initiate and maintain relationships with partneringfinancial institution and charitable organisations• Sharing donor lists


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3. MANAGEMENT FEESHARING

DESCRIPTION

Structure• Mutual fund company partners with charitable

organisation(s) and donates a portion of itsmanagement fee to this(these) organisation(s)

• Mutual fund’s net annual return is affected by MER, i.e.cost to unit holder while tax benefit accrues to mutualfund company

• Values of partnering financial institution important toparticipating charitable organisations

• Dollar amount of annual donations affected by mutualfund’s total net assets

MarketingDemonstration of corporate social responsibility andsupport of community and international development

Promotion• Mutual fund company may choose to mention this new

charitable donation program in its marketing programs• Marketing program for current donors to charitable

organisation partners

Distribution Not applicable

Administration Not applicable


Corporate income tax regulations re: charitable donations– Amount of donation is deducted from mutual fundcompany’s net income with limits (10 or 20 per cent of netincome though excess can be carried forward).

If a contract exists between partners, the amount donatedis a tax-deductible expense of the mutual fund company(Arthur Drache)


• Initiate and maintain relationships with partneringfinancial institution and charitable organisations• Sharing donor lists


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4. TRAILER FEESHARING

DESCRIPTION

Structure• Broker/dealer partners with charitable organisation(s)

and donates a portion of trailer fees earned on mutualfund assets to this(these) organisation(s)

• Broker/dealer receives tax benefit of charitabledonation

• Donation policy could apply to all trailer fees earned onall mutual funds or only those earned on certain mutualfunds

• Values of partnering broker/dealer important toparticipating charitable organisations

• Dollar amount of annual donations affected by mutualfund’s total net assets and changes in trailer feesOptional: Broker/dealer gives its sales representativesthe option of donating a portion of their trailer fees to acharitable organisation. Broker/dealer may choose tomatch donations by sales representatives

Marketing• Demonstration of corporate social responsibility and

support of international development

Promotion• Broker/dealer may choose to mention this new

charitable donation program in its marketing programs• Marketing program for current donors to charitable


Distribution Not applicable

Administration • Sales representatives: adjustments to record-keepingand trailer-fee income distribution re: charitabledonations


• Broker/Dealer: corporate income tax regulations re:charitable donations

• Sales representatives: personal income tax regulationsre: charitable donations


• Initiate and maintain relationships with partneringfinancial institution and charitable organisations

• Sharing donor lists


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5. AFFINITY SALES DESCRIPTION

Structure• A direct-sales mutual fund company broker/dealer

partners with charitable organisation(s) and pays atrailer fee (or makes a donation) to the charitableorganisation(s) on mutual fund assets resulting fromsales generated from mailing list supplied by charitableorganisation(s)

• Values of partnering mutual fund company important toparticipating charitable organisations

• Dollar amount of annual donations affected by level ofsales from charitable organisation’s mailing list

Marketing• Demonstration of corporate social responsibility and

support of international development

Promotion• Marketing program for current donors to charitable


Distribution • Direct sales

Administration • Tracking sales generated from charitable organisation’smailing list


• Corporate income tax regulations re: charitabledonations


• Initiate and maintain relationships with partneringfinancial institution and charitable organisations

• Sharing donor lists

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