What’s up in the boutique sector?

By John Lorinc | September 4, 2013 | Last updated on September 4, 2013
6 min read

Sarah Bull, a portfolio manager with KJ Harrison & Partners in Toronto, recently dealt with a new client swimming against the current.

A successful entrepreneur who’d dedicated most of his attention to his business, the client had realized his holdings were dominated by high-MER mutual funds and a dizzying collection of securities. “It was a transactional relationship, and very product-driven,” Bull says.

The client had just sold his business and wanted to hit reset. Bull says he came to her firm to create a portfolio “that reflected his convictions.” He also wanted to know how his new investment counsellors made picks. “That world of high MERs is gone now,” adds Bull. “That’s why he came on board.”

Bull’s client is bucking a trend. Canadian banks have secured substantial market share in the wealth management space, either by investing in their own integrated operations or by acquiring some of the country’s largest independents: Wellington West (National Bank Financial), Dundee (Scotiabank), McLean Budden (CIBC) and Phillips, Hager & North (Royal Bank). Often, they’ve done both.

A March 2013 assessment from the IIAC paints a bleak picture. “While all firms face weak equity markets, the impact is keenly felt among boutique firms,” wrote chief executive Ian Russell in a letter to members. “The viability of the smaller boutique firms is threatened, unless a market turnaround occurs in the near term.”

The report notes total revenue at boutiques shrank by roughly one-third—$4 billion in 2012, down $1.7 billion from 2006-07 levels. While some of the decline has to do with post-meltdown market declines, most of that loss occurred in the past two years, and reflects ongoing erosion in broker commissions.

Charlie Spiring, one founder of Wellington West, cites the new securities regulations imposed following the 2008 meltdown, as well as investor skittishness.

He adds Wellington’s decision to sell to NBF was driven in part by his advisors’ desire for greater security, as well as the ability to promote other products and services—such as insurance—to clients. “It would be difficult to start a Wellington West today.”

Boutiques still doing well

Keith Sjogren, managing director at Investor Economics, says while the big banks are increasing market share, so are independents like Connor, Clark & Lunn; Burgundy; and Nicola Wealth Management.

“With their integrated private wealth management solutions, banks have an advantage,” he says. “However, a disproportionate number of entrepreneurs may be attracted to firms owned by other entrepreneurs.”

While banks will likely continue to gain share, “One or two large independents that have lost share may be skewing statistics and creating an impression that all independents are losing. But well-run boutiques continue to grow at a good pace. Firms that provide alternative investments, or that have a strong position in a regional market, such as Mawer in Calgary, will also do well.”

Margaret Franklin, president of Marret Private Wealth (formerly Kinsale) in Toronto, sees divergent trends in the United States and Canada.

“While there’s increasing aggregation to the banks in Canada, it’s the opposite in the U.S., where the registered investment advisor market is growing, and there are some large independent financial advisors.”

One reason, Franklin suggests, is reputation. “While banks in the U.S. have been tarnished through the financial crisis, Canadian banks have withstood that carnage, and have capitalized on that.”

Warning

Downside of a one-stop shop

Marg Franklin, CEO of Marret Private Wealth, says, “A lot of people who come to us feel a lot of pressure to buy insurance or other non-investment products [at the bank-owned firms]. I’ve heard that now several times.”

Banks’ private wealth advisory practices see cross-selling opportunities as the advantage to being under one roof. They can offer life and disability insurance, estate planning, wills and other professional services.

The question for boutiques, then, becomes whether to go head-to-head with similar diversified wealth management and financial planning services, or stick to a specialty.

Rob McConnachie says his firm, Dixon Mitchell, has opted to stick to investing instead of transforming itself into a full-service firm.

“We’ve discussed it,” he says, noting some advisors say it would help retain clients. But they’ve decided against that step because some family offices and financial planners rely on Dixon Mitchell’s expertise in the Canadian equity market. “We don’t want to step on their toes.”

Enter Pershing

The arrival last fall of Pershing LLC, the New York-based clearing and settlement powerhouse, may further affect the ongoing market-share battle.

The firm, owned by BNY Mellon, provides back-office services to 1,500 dealers globally. Frank LaSalla, who runs the Canadian operation, says the company opened a Toronto bureau in response to requests from existing international clients that have expanded to Canadian markets since 2008.

“Canada became a compelling marketplace to enter,” says LaSalla—with 200 brokerages and 3,000 advisors, it’s a highly mature market. Pershing also sees opportunities to partner with established advisory groups with $300 million to $400 million under management, as well as large entrants.

“None of us are worried about a slowdown in the boutique [sector] right now,” LaSalla says. “There may be a flight to safety, but it’s being stabilized. We feel pretty comfortable it will be reversed at some point.”

Some Canadian boutique firms don’t expect that Pershing’s presence will make much difference in their niches. “They’ll go after giant firms, not little boutiques,” observes Rob McConnachie, CIO for Dixon Mitchell Investment Counsel in Vancouver. “It’s elephant hunting.”

Franklin agrees. “It probably won’t make much difference in our market for a number of years.”

To survive, boutiques must create meaningful distinctions between themselves and the integrated bank-owned firms, which are growing their private wealth management practices.

Marret set up shop three years ago with a value proposition tailored for the volatile aftermath of the credit crisis. Wealthy investors needed to manage risk and returns, and Franklin’s view was that “a long-only strategy was probably going to be challenged.”

Her firm appealed to clients who had significant sums of cash sitting on the sidelines. Marret has adopted a hedge-oriented portfolio strategy that includes dividend-yielding stocks with market hedges, as well as investment grade and short duration high-yield bonds with treasury hedges.

KJ Harrison, which manages about $600 million for approximately 300 families, built its private wealth niche around goals-based investing.

For every client, “We do a strategic wealth plan that analyzes where they are and takes into consideration their short-term, long-term and legacy goals. We establish which goals are discretionary versus required,” and then consult with clients’ tax, estate and insurance advisors. The firm can also tailor portfolios to focus on specialties, such as technology.

Colin Stewart, CEO at JC Clark Ltd. in Toronto, adds clients have become increasingly attentive to the investment decision-making process. “They don’t want to be five steps removed from the person doing the investing,” he says. “[Clients] are definitely taking a close interest in exactly what’s going on with the underlying strategy.”

Despite these positives, overhead costs associated with growing compliance requirements, coupled with the relentless downward pressure on commissions, have forced most boutiques to either look for new opportunities to diversify offerings, or forge partnerships with other firms.

Franklin expects further waves of consolidation in the independent sector in the next five years.

But boutique firms also have an opportunity to distinguish themselves by providing clients with grounded, realistic advice. The key message in this environment is that the era of eye-popping returns won’t be back for a long time, says Franklin.

“I think we’ve hit the age of limits.”

John Lorinc is a Toronto-based financial writer.

John Lorinc