Here’s the good news: despite economic and industry challenges, the investment industry’s performance, “when viewed on an aggregate basis, has been remarkably solid and stable over the past four years,” says Ian Russell, president of the IIAC, in his latest letter.
This is a surprise, he adds, when you think about “the pressing need to keep pace with innovation and […] unrelenting tempo of regulatory reform.”
But don’t get too excited. The downside is “earnings performance has been far from uniform when examined from a more disaggregated perspective—in terms of type of business and size of firm.” Large integrated and mid-sized firms have done relatively well over the last three years, he writes, while independent institutional firms and small retail firms have, on average, “recorded relatively poor performance.”
If you think about the hurdles firms are facing, that makes sense — Russell mentions massive shifts in consumer demand and demographics, and accelerating innovation, for example.
He mentions five factors to consider and monitor:
- the steady protraction of revenue increases from wealth management operations;
- the weak earning outlook for junior resource companies and retail and institutional participation in venture equity markets;
- the escalation in operating costs;
- the push for enhanced productivity and performance; and
- the pressure on earnings as fee revenue gains slow and operating margins tighten.
Also keep an eye on industry consolidation, says Russell, who blames, in part, “a retrenchment in institutional and retail business activity and [the] related squeeze in operating margins.” For many firms, he suggests, the choice is to either join forces or exit the business.
Of course, one of the risks of too many mergers is there will be less competition, leading to consumers having less choice. Russel’s also worried about increased M&A eroding “the dynamism in capital markets” and “weakening trading and financing activity.”
To date, these are the industry’s firm statistics: as of Q2 2017, the IIAC finds there are 166 firms operating in the Canadian industry, across the integrated, retail and domestic institutional channels. That represents an increase of 1.2% over last year, compared to decreases in the number of firms between 2016 and 2013 — from 189 in 2013 to 163 in 2016.
What about wealth management?
The last three years have been strong for retail revenues, says Russell. They’ve “expanded at a surprising average annual rate of nearly 11% over the past three years,” with both large and small firms benefiting “from sustained expansion in retail demand for financial products and advisory services.”
The strength of wealth management reflects factors such as expanding demand from wealthy and middle-income clients alike for new products and strategies — despite challenges like continued low rates, volatility and uncertain outlooks for economies and markets.
The result? “The retail advisory business has become even more the dominant business line in the industry, increasing the retail share of total revenue to about 60% in 2016,” says Russell.
When it comes to fees, Russell finds, “Fee revenue from fee-based accounts and discretionary managed accounts has sky-rocketed in the past five years, up almost twofold, to $6 billion in 2016. Fee revenue accounted for slightly more than 50% of retail revenue, up from less than 40% in 2012.”
Meanwhile, “Fees on discretionary managed funds and mutual funds have been driven steadily lower from competitive pressures in the marketplace.”
However, Russell predicts gains in revenue from the wealth management business to moderate over the next year or two.
“The biggest impact on the retail business will be a slowing in fee income as mid and high-income baby boomers move further into the pre- and post-retirement phase, and [as] the portfolio adjustments and financial planning needs for retirement are completed and eventually stabilize,” he says.