Skip to main content

Canada’s big banks, brokerages and investment counselling firms are jockeying for clients as the number of wealthy people grows. But Big Tech is waiting in the wings, too, ready to disrupt the scene.

Getty Images/iStockphoto

There is no question that the number of wealthy people in Canada is growing. But the million-dollar question is: Who will manage their money?

The number of high-net-worth Canadians grew by 11.3 per cent to 356,900 in 2016, according to the Capgemini World Wealth Report 2017. Their financial assets, in turn, grew by 11.7 per cent to $1.1-trillion.

Many of these newly wealthy people will need help caring for their fortunes. But with so many banks, brokerage firms and investment counsellors competing for the business of a finite number of people, is there enough money to go around? What services are needed to attract and hold the restive rich these days?

Story continues below advertisement

To start, these investors want much more than investment management, says Keith Sjogren, managing director at the data-analysis firm Investor Economics Inc.

They want financial planning that extends beyond retirement to tax issues and the transfer of wealth from one generation to the next, he says. Asset allocation and portfolio rebalancing will be done by computer software.

The three competitors

Here are the three main channels for advice to wealthy investors, according to a joint report prepared by Investor Economics and the Canadian Securities Institute:

The banks, through their private banking divisions.

Private bankers provide day to day banking services to the well-heeled "in very comfortable surroundings," Mr. Sjogren says. The most sophisticated part of the business is on the lending side, where they provide loans and lines of credit to help wealthy families deal with cash-flow issues, he adds.

Full-service brokerage firms. Most of the big investment dealers are owned by the banks but a few are still independent.

Story continues below advertisement

Investment counselling firms, which charge an annual fee based on a client's assets. Some are bank-owned but many are still independent.

Independent investment counsellors are used by 20 to 25 per cent of millionaire households, Mr. Sjogren says. The rest rely on the banks with their full-service brokerage arms.

"For every $1 managed by an investment counselling firm, $3 is being run by brokerage firms for their high-net-worth clients," Mr. Sjogren says. "There's clearly intense competition between the industry groups."

Adding to the mix is the recent trend whereby sales representatives at the brokerage firms are upgrading to become portfolio managers. This designation allows them to manage money on a discretionary basis, putting them in direct competition with the investment counsellors. (Discretionary means the portfolio managers can buy and sell on their clients' behalf.)

This trend has led to competition even within the banks, with bank-owned investment counsellors competing with the growing number of investment advisers at the same bank's full-service brokerage firm who are licensed portfolio managers.

Today, "well over a third of the 10,000 or so IIROC advisers [at brokerage firms] can manage money on a discretionary basis," Mr. Sjogren said. IIROC is the Investment Industry Regulatory Organization of Canada.

Story continues below advertisement

"That's a significant increase over the last five years," he notes. "Individual advisers and their firms are now able to meet the competition from investment counsellors because they both are providing discretionary asset management services for a fee."

Much of the growth in this part of the business – that is, discretionary money management – is coming from existing clients who are converting from a non-discretionary, commission-based model to a discretionary one, Mr. Sjogren says.

Enter technology

While fintech disruptors such as robo-advisories have taken square aim at the wealth management business, the greater fear is that Big Tech – Facebook, Google and Amazon – could muscle in on the scene.

The fintech revolution has fizzled as startups realize they will struggle to succeed alone, according to Capgemini and LinkedIn's latest World FinTech Report, released this week. The big banks and brokerage firms simply subsumed the robos by forming partnerships with them, licensing their technology or even creating their own online portfolio managers.

If Big Tech enters the lucrative money-management business, will they be content to partner with the incumbents?

"Tech giants would be able to pick and choose their points of entry into financial services, maximizing their strengths like rich datasets and strong brands, while taking advantage of incumbent institutions' dependence on them," according to a report published last summer by the World Economic Forum.

"As a result, financial institutions will likely need to walk a challenging line between capitalizing on the services of large technology players and becoming dependent on them."

There's also the question of how clients of the investment firms would view such a revolution. Will the wealthy welcome the inevitable use of advanced technology in money management?

Of the high-net-worth investors polled in Capgemini's World Wealth Report 2017, 56 per cent said they would consider using Big Tech for wealth management, said Tej Vakta, Capgemini's senior leader, global capital markets practice. Wealthy individuals said they would expect improved efficiency, transparency, innovation and excellent online capabilities.

The picture was a little different for Canada, where only 33 per cent of high-net-worth investors said they would consider investing through big technology firms.

"In Canada, high-net-worth individuals are a little shy of buying services from Big Tech," preferring instead to deal with financial institutions, Mr. Vakta says.

Partnerships are likely

No doubt technology, big and small, will disrupt the financial services industry, but it could also become an indispensable partner, Mr. Vakta says. If Big Tech does decide to enter the market, it will likely be through partnerships with existing wealth-management firms, he adds.

The goal of the technology giants would be to help the incumbents "overcome tepid satisfaction rates among high-net-worth individuals," the Capgemini report says. The satisfaction of high-net-worth individuals with their firms and wealth managers is "muted," at 58 per cent and 56 per cent, respectively, the report notes, with limited service options and fee structures emerging as possible reasons.

"Firms that are able to combine their wealth management expertise with Big Tech's customer experience skills could lead the way by offering truly innovative services," Capgemini executive vice-president Anirban Bose, head of global banking and capital markets, wrote in the report.

As the wealth-management industry evolves and technology plays whatever role it ultimately will, "the fundamental, core value of the investment adviser will remain important," says David Hurd, wealth and asset management advisory leader at Ernst & Young Canada. That is, understanding the needs of their clients and advising them accordingly.

Clients will be the winners, Mr. Hurd says. From a competitive perspective, traditional firms will be using a blend of new technological capability and human advice.

It will, he said, make for a "much better, enriched client experience."

Financial advisor Mark Coutts gives a breakdown of the four core considerations in investing.
Editor’s Note: An earlier version of this story misstated the assets held by high-net-worth Canadians in 2016. The amount is $1.1-trillion, not $1.1-billion.
Report an error Editorial code of conduct
Comments are closed

We have closed comments on this story for legal reasons or for abuse. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.