The white flag of surrender hasn’t quite been raised, but the war for the Canadian investor looks all but over.
Coming out of the financial crisis, the big banks and independent retail brokerage firms each had big ambitions to expand their businesses. The crisis and the stock market crash, they hoped, would bring opportunity; rattled investors would want help and advice on how to repair their battered portfolios and save their retirement plans.
Several years later, what seemed like an even-handed fight between the banks and their smaller independent rivals has become lopsided. And it’s the Big Six that are winning.
It’s a tough pill to swallow for someone like Andrew Marsh, who has been on both sides of the battle. For 12 years, he built a solid business as a retail broker in London, Ont., giving financial advice to a lengthy roster of loyal clients at Bank of Nova Scotia’s investment division, ScotiaMcLeod.
But in 2004, he left it all behind to become one of the co-founders of GMP Private Client, an advisory shop created by investment bank GMP Capital Inc. to butt heads with the banks. It seemed like a good decision – until the market crashed.
Losing money, Mr. Marsh’s firm merged with rival Richardson Partners in 2009 to bolster both companies’ balance sheets. The combined entity, Richardson GMP Ltd., is still struggling, posting a loss in 2012. Canaccord Genuity Wealth Management, another independent, hasn’t turned a quarterly profit in a year and a half. Small firms that generate most of their revenue from advising retail investors collectively lost $99-million last year, according to the Investment Industry Association of Canada.
The banks, meanwhile, are swimming in profits. Though they also suffered during the downturn, their wealth-management divisions, which sell mutual funds and other products to millions of Canadians, rebounded with incredible speed. Royal Bank of Canada’s wealth division made $763-million last year, while Toronto-Dominion Bank’s earned just over $600-million in the same period.
This is no accident. The banks have invested heavily in their asset management and financial advice operations, hoping these businesses can combat slowing growth in other units. Canada’s housing market is cooling, making it harder to find growth in selling mortgages; revenues from investment banking and other high-end corporate businesses are volatile, and are now feeling the effects of the capital drought in the energy and mining sectors.
There’s also an element of safety to the Big Banks’ strategy. Since the crisis, banking regulators have been tightening up the rules for how much capital banks need to hold. The business model of wealth management is a simple one – it’s about helping people to invest their money in return for a fee – so there’s no risk of the kind of catastrophic trading losses that brought down major U.S. banks in 2008. For that reason, regulators don’t demand that banks hold a large capital cushion against these units.
“Clearly, wealth is a nice offset to credit businesses and trading divisions that carry different risk profiles,” RBC chief executive officer Gordon Nixon said.
Against this backdrop, banks are getting more aggressive. The acquisitions are starting to add up. Scotiabank scooped up independent DundeeWealth for $2.3-billion in 2010 and National Bank of Canada acquired Wellington West Holdings Inc., an independent brokerage, as well as HSBC Bank Canada’s retail brokerage arm. The country’s biggest banks now control nearly half of all the long-term mutual fund assets in Canada; by some estimates, they have 90 per cent of all the assets in retail brokerage accounts.
That leaves little for the four big non-bank brokerage firms – Canaccord Genuity, Richardson GMP, Raymond James Ltd. and Macquarie Private Wealth Inc. – as well as their smaller peers.
But while the numbers say that the banks look smart, the independents tell a different story. They argue that the Big Six are using their natural advantages – their size, deep pockets and vast networks of bank branches on street corners everywhere – to push them aside. Mutual fund companies are also feeling the pain, as banks continue to take away market share from the likes of AGF Management Ltd. and others.