Toronto’s future as a financial capital

Strolling through a community fair in upper New York State during summer 2006, a Canadian journalist encountered a booth festooned with banners advertising easy availability of mortgages and asked for information. “These are what are known as sub-prime mortgages,” the booth attendant said. “They’re for people who have trouble getting ‘regular’ mortgages.”

The journalist remarked that members of his profession sometimes had difficulty qualifying for mortgages. “No problem. We approve almost everybody,” the booth attendant responded, explaining that applications went through subsidiaries of a well-known bank then aggressive in the sub-prime market.

Some passersby accepted the attendant’s blandishments. As it turns out, their mortgages may have figured in the meltdown that helped trigger massive writedowns at the formerly aggressive bank and at other American banks, with more expected within several years.

During the same summer, at an academic meeting in Montreal, Nathanael Matthiesen, a California sociology student presented a paper arguing that Toronto had become Canada’s financial capital partially by displacing Montreal’s influence, which he attributed to several factors, including separatist politics. “I believe this political climate has caused Toronto to be more attractive to both national and foreign investment, with the result being Toronto becoming the nationally prominent financial center,” he said in the paper.

Now, while the world staggers through the economic crisis, some lobby groups and financial services veterans suggest that Toronto’s reputation as a financial capital may again by burnished, thanks to the relative stability of Canadian banks and insurers.

Their capital strength makes foreign acquisitions possible, which will in turn boost Toronto’s status, suggests Gavin Graham, director of investments at BMO Asset Management.

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He sees the removal of foreign content restrictions as an early contributor to the scenario, since it allowed asset managers to increase their foreign allocation and allowed for acquisitions such as BMO’s 2007 takeover of British money manager Pyrford International plc.

“There are now enough assets invested outside Canada that it’s worthwhile for Canadian money management firms to start hiring people with international experience or buying companies which manage international assets,” says Graham, whose resumé includes positions in other financial capitals.

The stability of the financial system is featured in sales pitches abroad, although Umgad Chadda, vice-president, business development and strategy, for the TSX and Toronto Venture Exchange, says it is a tertiary issue and focuses on the broader value proposition. He sees the downturn as an opportunity to get the attention of foreign companies planning to go public after the crisis. “We’ll be hopefully well-positioned for a recovery based on all the hard work that we’re doing.”

If this scenario plays out, it would mean increased hiring of specialized professionals, making southern Ontario the financial services version of Silicon Valley, predicts Tim Thompson, senior vice-president, investor relations at TD Bank Financial Group.

As Silicon Valley became a leading high-tech centre with large numbers of specialized professionals, Thompson foresees Toronto becoming a larger financial hub, attracting increasing numbers of financial professionals and other service providers.

“If you have a Canadian financial services market that’s concentrated in Toronto, if these companies are still investing, that means you can attract talent from other places [such as] some of the U.S. banks, some of the global banks,” he says, noting that a smaller cluster has already taken shape.

The picture has some blemishes, two of them related to taxes. In a recent Financial Post op-ed feature, Stephen MacPhail, president of CI Financial, suggested that if Ontario implements a harmonized sales tax as has been rumoured, his firm would consider moving some operations to another province.

Meanwhile, several advisors suggested to Advisor.ca that Ontario’s high tax brackets might discourage foreign executives from considering a move.

Still, if BMO’s Graham, TD’s Thompson and TSX’s Chadda have it right, the future holds potential for Toronto’s financial advisors.

“As far as the size of the market, I think it increases the market for advisors, if only because that’s how capitalism works. You’ll have all these high-income earners,” suggests Paul Bourbonniere, principal at Polson Bourbonniere Financial Planning Group Inc. in Toronto.

Brushing up on Canada–U.S. tax laws, especially as they apply to American executives temporarily living in Toronto, would certainly give an advisor an advantage, Bourbonniere says. An advisor can accomplish that through courses or by establishing a network of accountants and other centres of influence that do cross-border planning.

Financial advisors would also have more access to foreign investments and money managers handling them, Graham predicts.

Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.

(03/17/09)