Canadian wealth managers focus on market performance growth path

(February 6, 2003) Canadian wealth managers — banks, insurance companies, investment counsellors and mutual fund distributors — foresee future growth in better stock market performance, not by buying rivals, a survey by PricewaterhouseCoopers reports.

The survey, which polled 25 wealth managers with a total of $1.4 trillion in assets, found that 40% of wealth managers rated asset performance as the first or second most important path to growth. "The survey shows that mergers and acquisitions are not perceived as the panacea for gaining new customers and increasing profits in the wealth management arena," said Barry Myers, managing partner for PricewaterhouseCoopers’ Canadian financial services practice.

That picture changes according to the sector in the wealth management industry, the survey indicates. Banks were more likely to cite mergers and acquisitions, as well as developing new distribution approaches and improving sales effectiveness as a means to growth. By contrast, investment counsellors and life insurers saw better asset performance as key. For the direct distributors, new products were regarded as a growth driver, as they were for the insurance companies. The direct distributors also looked to branding to increase market share.

"To achieve long-term profitability and new clients, companies intend to focus more attention on other aspects of their business models, such as marketing and branding, new distribution channels and new products," Myers added. At the same time, mergers and acquisitions rank low among all wealth managers because of dearth of opportunities. "Who’s there to acquire?" Myers asked. "Mackenzie was acquired by Investors Group, TAL is now 100%-owned by CIBC. So organic growth has now become the name of the game."

The survey is the first of its kind in Canada, though PWC has conducted European and North American surveys of wealth managers before. "It’s an evolutionary process," explained Myers. "We started with a study which we did in 1998 on a global basis with the Economist Intelligence unit, which culminated in a study entitled ‘Tomorrow’s Leading Investment Manager.’ It’s quite interesting that since then we’ve done surveys in Europe, and earlier in 2002 we did the North American Wealth Management Survey and more latterly the Canadian Wealth Management Survey. The predictions of the industry in 1998-1999 seem to be coming to pass. They’ve been properly and accurately predicted."

Degrees of wealth

The typical client of the wealth managers, the survey said, is middle-aged — from 50-70, with a college degree, an income of $200,000 to $500,000 with a net worth of $1 million. The most affluent clients were with the investment counsellors, while the mutual fund distributors had no clients with a net worth of $1 million. Their clients were also less likely to make more than $200,000. While all sectors are looking for higher net worth clients, Myers thinks that even the mass affluent, with $100,000 to invest, can generate profits for wealth managers — but it depends on how they segment their clients, and what resources they bring to bear.

"Clearly if you don’t have distribution you don’t have a business, so that’s where the client segmentation comes in," Myers said. "The study covers the massively affluent, with $1 million in net worth, between $200,000 and $500,000 in disposal income and then you’ve got the high net worth investors who have even greater than that." They are generally clients of investment counsellors. "But then there’s also the lower level of investors and they shouldn’t be forgotten," he added.

"It would not be a high-profitability area for the pure investment management operations but with appropriate technology and appropriate staffing and resourcing, the banks or even independent financial planning organizations can make it profitable."

Holistic approaches

One reason it can be profitable is that increasing numbers of baby boomers are now seeking advice about their retirement prospects. They are disinclined to take a do-it-yourself approach, and more likely to prefer an all-in fee for service. To make wealth management profitable for different segments of investors requires wealth managers to do two things. The first is to offer all-encompassing wealth advice and management.

"I think the banks have shown a lot more interest in wealth management," Myers said. "A good example is CIBC acquiring both 100% of TAL, and in the same year Merrill Lynch. So it’s putting the traditional four pillars under one, and having an articulated wealth management strategy. So who’s capitalizing? The investment counsel business tends to target the high net worth whereas the insurers and the banks in particular are after what I call the mass affluent."

At another level, firms have to embrace account aggregation. "I think it is a very significant trend," said Myers. "It is occurring not only in the major financial institutions, in the life insurer organizations and bank organizations but even among the relatively smaller financial planning organizations that are looking at bank products to offer to their clients and purely insurance products. So it’s a more holistic wealth management service."

The overall focus of the wealth managers is improving revenue growth and obtaining new clients, rather than adding new products. One reason for the low score for new products, the report said, is that "there is less need to develop proprietary products as long as clients have access to a comprehensive product offering provided either in-house or by third-party providers."

Proprietary products less important

In fact, that’s a reflection of the increasing sophistication of clients. "Clearly the wealth management industry has changed and it has changed dramatically. In my view, the main reason is the aging of the baby boomers," said Myers. "They’ve increased their personal net worth and wealth, they’re far more educated and the markets haven’t been really kind to them but they still are on the cusp of that retirement stage so they’re trying to increase their net worth for retirement. Being educated, they’re far more demanding, and challenge the industry to serve them."

That results in pressure for "best-in-class" personnel and products, Myers said. "Leaders have had to be far more innovative, creative and flexible which requires hiring the best-in-class people, and not only hiring them, but retaining them by continuing to develop them with continuing education and not just on-the-job training. You’ve got to pay them.

“You’ve got the aging baby-boomers creating a demand, but to be able to exploit that demand, you’ve got to be best in class or perceived to be best in class by that population.”

The same logic applies to product development, especially because the number-one reason the wealth managers cite for clients leaving is poor investment performance, which "reinforces the need to offer ‘best-of-breed’ third-party products," the report said.

"Proprietary product is quickly becoming, I wouldn’t say redundant, but it’s losing its way," Myers said. "You’ve got to be able to offer non-proprietary product and a multi-class of product. I don’t mean multi-class of mutual funds but everything from the hedge fund environment to alternative classes of investments because you’re dealing with a more informed community."

Filed by Scot Blythe, Advisor.ca, sblythe@advisor.ca.

(02/06/03)