Pandemic accelerating shift to low-fee funds, report says

Canadian banks’ wealth management businesses — long considered a strength — are likely to remain under threat for the remainder of 2020, says Fitch Ratings.

In a new report, the rating agency said the wealth management and capital markets segments of the big banks will face pressure this year from a combination of ongoing market volatility, pandemic-driven uncertainty and an accelerated shift to ETFs.

“The momentum of Canadian bank wealth management businesses prior to the coronavirus pandemic is expected to be offset by higher customer redemptions and lower sales, with continued outflows in assets under management and assets under advisement,” Fitch said.

In particular, the report said that the banks’ substantial mutual fund businesses face weakness in the year ahead.

“Fitch expects elevated market volatility, leading to a sustained lower level of investor confidence, lower AUM and AUA levels and thus depressed mutual fund revenues over the near to medium term,” the rating agency said.

Additionally, the report said that banks’ revenues could be hurt if investors shift to more defensive mutual funds, such as fixed income funds, which generate lower revenues.

The report said that the long-standing trend toward cheaper, passive strategies also points to lower asset management revenues.

“The pandemic has accelerated long-term underlying trends in Canadian wealth management business models as investors become more cost [conscious] and migrate from mutual funds to lower fee ETFs,” Fitch said.

“Wealth management and capital markets revenues were a relative bright spot for Canadian banks prior to the pandemic, but will be pressured for the remainder of 2020,” Fitch concluded.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.