Canada’s biggest banks are hogging most of the profits in the highly competitive wealth management field.Michelle Siu/The Canadian Press
Despite the best efforts of independent investment dealers to make a name for themselves in wealth management, Canada's biggest banks are hogging most of the profits in the highly competitive field.
Shortly after the Great Recession, wealth management became the hot ticket on Bay Street. Not only was the business destined to catch fire as baby boomers neared retirement, triggering their need for financial advice, it was also a safe and relatively cheap bet. Unlike capital markets arms that are backstopped by big capital cushions that safeguard against speculative trades, wealth management's revenues mostly come from risk-free client fees that tie up little capital.
As firms rushed into the rich new markets, aiming to compete with established players such as CI Financial Corp., they scrambled to recruit financial advisers, courting the best with million-dollar signing bonuses. But with so many companies attempting to bulk up, the market quickly became oversaturated. There were only so many clients and retail brokers to go around, and as the quarters passed, the banks kept churning out profits while many of the independents limped along.
In the past three quarters, Canaccord Financial Inc.'s Canadian wealth management arm has failed to post a profit, and the investment bank recently said that it would close 16 of its wealth management branches and trim its number of advisory teams by 35 to 180. Richardson GMP, the retail arm of GMP Capital Inc., has also posted three consecutive losses. The Big Six banks, meanwhile, put up quarterly profits typically amounting to $100-million or more over the same period.
"They've got time on their side, and money on their side," Earl Evans, head of Macquarie Private Wealth Inc. in Canada, said of the banks. Unlike the independent dealers that rely on capital markets, banks are driven by stable profits from their retail operations. Even if wealth management stumbles for a few quarters, the banks can subsidize the shortfall using profits from other areas. Mr. Evans has seen this first-hand. Although Macquarie is an independent dealer in Canada, Macquarie Group has global operations with a big balance sheet that helps the Canadian operation to invest for the long-term.
Strong retail banking divisions also offer the banks the opportunity to cross-sell. When someone visits a branch looking for a student loan, Toronto-Dominion Bank can ask the client if they're interested in setting up an RRSP – and if so, can offer its in-house funds. When independent dealer Raymond James Ltd. wants to offer a client a mutual fund, the broker can only offer external products, which cuts into its fees.
About three years into the wealth management war, Royal Bank of Canada leads the pack with roughly $170-billion assets under management in Canada. But David Richardson, vice-president of global asset management, said being big isn't a recipe for success. There is strategy involved, and four years ago RBC doubled the size of its team that markets the bank's in-house products to other brokerages. RBC has also been plotting its growth for some time, considering it bought Phillips, Hager & North Investment Management for $1.4-billion in 2008.
Bank of Nova Scotia is also doubling down. In 2010 its wealth management platform was ranked just 13th in the country, based on assets under management, but by shelling out $2.3-billion to acquire DundeeWealth Inc. In 2010, Scotiabank quickly leap-frogged to fourth in the rankings and today manages about $109-billion in Canada.
With a good base under him, Chris Hodgson, Scotiabank's global head of wealth management, said his team can now focus on things like cross-selling Scotiabank and Dynamic Funds – acquired in the Dundee deal – in the bank's roughly 1,000 branches across the country.
Tim Kiladze