Investment Industry Association of Canada (IIAC) president and CEO Ian Russell identifies 2014’s key trends in his latest industry letter. Here are the highlights:
Improving industry performance (for some)
Revenues and earnings of the integrated firms in the past year have now exceeded 2006-07 levels, while boutique firms have not made a similar recovery.
The larger integrated and boutique firms demonstrated relatively better performance given their advantage of scale to absorb rising fixed costs of technology for compliance and enable efficient front and back-office operations, diversity of product and services, and multiple channels to deliver financial services.
Fixed-income trading advantage, and eroding liquidity
The earnings contribution of fixed-income capital markets operations at the integrated firms offered a comparative advantage over the boutique firms.
Canada has not escaped the eroding liquidity trend. Canadian regulators have exhibited a careful and responsible approach to the bond transparency agenda, moving cautiously to avoid exacerbating the thin cushion of liquidity underlying trading activity.
Further industry consolidation
The tightening vise of weak market conditions, despite the welcome respite in 2013-14 for retail boutiques, and the rising fixed and variable costs of carrying out business, has forced smaller firms to take stock of their competitive position in the marketplace.
IIROC-registered firms now total 179, down from about 200 firms two years ago.
CRM 2 requirements, embracing the disclosure of fees, transaction charges, advisor compensation, and portfolio performance requirements, will be rolled out this year and over the next two years.
The format of fees charged and advisor compensation, securities valuation issues and portfolio performance computation are complex matters, requiring clear direction from the regulators before technology can be developed and systems put in place.
From all these rules fixed and variable costs will rise significantly at all firms across the industry. The IIAC has been active in the last three years mobilizing the industry to shape the proposed rules, facilitate rule implementation, develop guidelines and templates for firms, and petition for extension to rule deadlines.
Boutique firms have also had to contend with the unintended consequences of spiraling market data costs.
Promoting capital-raising in the small business sector
IIAC has vigorously advocated two policy ideas to stimulate capital-raising for the small and mid-sized business sector to renew economic growth and job creation:
1. A mechanism to re-allocate capital from investments locked up by the incidence of potential capital gains tax. The mechanism would enable investors to sell investments and defer capital gains tax conditional on re-investment in eligible small business shares; and
2. A Canadian equivalent of the U.K. Enterprise Investment Scheme that provides a 30% personal tax credit for the purchase of eligible small business investments (shares of new and early stage businesses), and an exemption for follow-on capital gains, if the investment is held for a defined period. This program has been consistently successful over the past twenty years in the U.K. simulating the growth of the small business sector in that country.
Aging baby boomers have shifted portfolio emphasis from transactional focus to discretionary managed portfolios tilted to conservative asset allocation, combined with greater focus on income and asset distribution.
This has raised the demand for a wide range of diversified investment products, choice in discretionary management, and financial/estate planning services.
This has forced smaller firms to broaden wealth management operations in terms of products and services, well beyond the traditional brokerage operations, and build a cadre of well-trained and skilled advisors, emphasizing a strong financially focused client relationship.
Assets managed or controlled by women
Presentations at SIFMA conferences and meetings have indicated that by 2025, women will control or manage two-thirds of the wealth in the United States, requiring a proactive focus by firms to attract female clients.
Millennials: skeptical and tech savvy
This group is steadily increasing its earning power and is destined to benefit from the anticipated windfall of the so-called inter-generational transfer of wealth.
Surveys indicate that one-half the financial assets of the average Millennial are in cash and cash equivalents.
The challenge for the investment industry is to connect with this “internet generation”.
Capitalizing on online advice
Smaller investment dealers, with the application of technology provided through their carrier broker, would be able to access this downstream retail client on cost-effective terms.
This could be the strategy to attract younger clients at an early stage to the investment dealer, migrating these clients over time to a more sophisticated personal advisory relationship.