So far in 2013, there has been a lot of discussion about the potential for “one-stop-shopping” either through advisors or through certain financial institutions. This begs a basic question in my mind – can any one advisor or any one FI properly handle all of the financial matters for a client?
From the perspective of the FIs, they would like the public to believe that they can, in fact, handle everything through in-house advisors or a team of advisors. Does this claim stand-up in the cold light of day? I suggest not. Financial planning, in all of it’s complexities and forms, is based on a close personal relationship between the client and the advisor(s) involved. FIs suffer from a few issues in this regard including lack of continuity, perceptions of conflicts of interest in products and services recommended – predominantly in-house or house-labelled generic products – lack of objectivity also springs to mind.
So what about the individual advisor? Currently we have two versions of this creature on the loose – the independent group (the largest in numbers) and the closely-tied (or career) advisors that represent one company (maybe with one or two strategic alliances to flesh-out their potential offering). I will offer some comments on the latter here. Everyone knows that no one company – regardless of size and breadth of offering – can be all things to all people at all times. Assuming that you accept this premise, the ability of the closely-tied advisor to hande all matters is obviously seriously impaired as is their ability to claim to offer independent and objective advice on all matters financial.
So what about the independent advisor? Can they fill these gaps? Again, I have to say no. While the vast majority of these advisors seem to stress their ability and talents in this area, at best they make broad-brush attempts – albeit very well meaning – but still fundamentally lack the knowledge and full product and service suite.
Is there a solution? I believe the answer here is YES. I believe the answer is what I call “strike teams”. Stay tuned for my next blog where is hare this concept in more detail! Cheers
The most recent print issue of Money noted that the big Canadian banks managed to earn $31.7 billion in 2012, just a few years after there was grave concern that they’d even remain solvent.
“There is no question that Canadian banks play a vital role; locally, provincially, nationally and inter-nationally. Without the banks, our economy could simply not function efficiently or effectively. But are the banks getting too big and going too far to gain market share and profits at the expense of their own customers?” (Quote from Spring 2013 issue of Money Magazine.)
In November of last year I published a piece entitled Banks own the investment industry! A good thing? In many respects allowing the banks to provide everything from our mortgage to investment services is incredibly convenient. But at what price? It has become near impossible for many smaller investment dealers to stay in business. Fraser Mackenzie is a recent victim of an industry that requires scale in order to compete:
At their shareholder meeting on April 29th, 2013 it was decided: “Our assessment of the current business climate has led the owners to conclude that deploying our capital in the continuance of our regulated investment dealer businesses can no longer generate an acceptable rate of return. Institutional interest in early stage mining and oil & gas companies, sectors to which we have been heavily committed, has dried up: as has the associated trading in the equities of early stage resource companies. Furthermore, the regulatory cost burden is increasing at a time that industry-wide revenues are declining. On balance, it makes sense for our shareholders to re-deploy their capital.”
Indeed, well over half of the total value of trading done on the TSX in a typical month is conducted by the banks.
My guess is their actual market share of all trading is far above half if we were to also include trading platforms not part of the Toronto Stock Exchange. The banks keep growing, and the regulatory burden also grows more onerous. In my estimation, the larger financial companies relish regulation as an additional barrier to entry. Regulatory oversight is a minor inconvenience to the big banks, whereas for less diversified specialty businesses (mutual fund companies, standalone investment dealers, investment managers) the added expense can be devastating.
Obviously there are huge benefits to scale – but do consumers really benefit or are these economies of scale all kept as bank profits? MER’s for their proprietary mutual funds might appear very reasonable, but it’s impossible to determine whether or not the plethora of fees I pay for other services are subsidizing these seemingly lower expense ratios. Transparency is near impossible. Although many banks did collapse as a result of the the financial crisis, the massive rebound in the profitability of those surviving banks (even though they lost ridiculous amounts of capital doing stupid things with asset backed securities, derivatives trading etc.) suggests that those everyday fees paid by consumers and businesses must exceed the marginal cost of providing these services by quantum leaps and bounds.
Another concern I have – besides the demise of competition in the financial services industry – has to do with motivation. It’s true that every business is designed to make money, but in days of yore a mutual fund company, investment manager or stock broker had to have happy customers in order to succeed. If they didn’t help the client make money, the client would go somewhere else. I believe that as each independent firm disappears, so does choice. Making a great deal of money from you no longer requires you to be served well. What are you going do? Go to another bank?
The prime directive (to borrow an expression from Star Trek) of the financial services behemoths is profits. The financial advisor’s role is to enhance corporate profitability. Financial advisors today are increasingly handcuffed not just by regulatory compliance, but also ‘corporate’ compliance. Wouldn’t an investment specialist whose only mandate is to do well for his client be more properly motivated (and less conflicted professionally)? Would your investment objectives be better served by an independent advisor who is rewarded only because you the client are earning profits (and not because you are earning his employer more revenues)?
It isn’t necessarily true that an independent advisor is any better than one employed at a bank. I personally know of hundreds of outstanding advisors working at banks and insurance companies. But it must also be true that a satisfied, properly motivated, objective and focussed financial professional will do a better job whether he/she is at an independent or a bank.
We can’t begrudge the banks their success but left to their own devices, they’d all have merged into one by now. In December of 1998 then Canadian Finance Minister Paul Martin rejected the proposed mergers of the Royal Bank with the Bank of Montreal and CIBC with the Toronto-Dominion Bank. We know from our U.S. history that government and regulatory authorities are frequently frustrated by the political muscle (lobbyists, lawyers) of the large financial firms. Ultimately having one gigantic Canadian bank – providing all our financial services, investment needs, insurance requirements – might (or might not) be a worthy corporate ambition, but it’s hard to imagine such a monopoly being good for the likes of us. After all, just consider the progress that has been made in telecommunications since Bell Canada (or AT&T) was forced to reckon with serious competition.
The banks need independent players. Not only should banks discourage the obliteration (by bullying or by absorption) of non-bank competition, they should use their political muscle to keep the regulators from picking on Independent players. Government agencies cannot help themselves – if they are impotent against the strong they naturally attack the weak – even though when all the weak are dead the regulators would have no jobs. You don’t need a police force when there’s nobody you can effectively police.
Independent players create minimum standards of service and ethics, and fuel industry innovation. In every instance, the independent is a bank customer too. Mutual fund and investment managers pay fees to banks, buy investment banking offerings, custodial services and commercial paper and also trade through bank facilities. Independent dealers provide services and financing to corporations deemed too small to matter by larger financial companies; that is, until these businesses grow into large profitable banking customers. Put another way, why not adopt the Costco model where smaller independents can shop for stuff to sell to their own customers, and higher end specialty shops and department stores can all remain standing, rather than the take-no-prisoners approach of Walmart?
Let’s hope that the few surviving independent firms can be allowed to thrive, and if we’re lucky perhaps new players will arise to provide unique services to Canadian clients and homes for advisors who are inclined to specialize in managing and not just gathering assets.
Let’s face it! In the battle for investment dollars the Canadian banks are clearly the winners! Is this a good thing?
Once upon a time, the investment business was more of a cottage industry. Portfolio manager and investment broker were ‘professions’ rather than jobs. Smaller independent firms specialized in looking after their clients’ savings. There were no investment ‘products.’ The landscape began to change dramatically – in 1988 RBC bought Dominion Securities, CIBC bought Wood Gundy and so on – when the banks decided to diversify away from lending and began their move into investment banking, wealth management and mutual funds.
Take mutual funds for example. Over the past few decades Canadian banks have continued to grow their share of total mutual fund sales* – this should not surprising since by acquisition and organic growth in their wealth management divisions they now own the lion’s share of the distribution networks (bank branches, brokerage firms, online trading).
An added strategic advantage most recently has been the capability of the banks to successfully market fixed income funds since the financial crisis. Risk averse investors want to preserve their capital and have embraced bond and money market funds as well as balanced funds while eschewing equity funds altogether. With waning fund flows into stock markets, how can equity valuations rise? It’s a self-fulfilling prophecy.
Many of the independent fund companies, born decades ago during times when bonds performed badly (inflation, rising interest rates) and stocks were the flavor of the day, continue to focus on their superior equity management expertise. Unfortunately for the past few years they are marketing that capability to a disinterested investing public.
The loss in market share* of the independent fund companies to the banks continues unabated. Regulatory trends also make it increasingly difficult for the independent fund companies to compete. Distribution networks nowadays (brokers, financial planners) require a huge and costly infrastructure to meet compliance rules. Perhaps I’m oversimplifying, but once a financial institution has invested huge money in such a platform does it make sense to then encourage its investment advisers and planners to use third party funds? Not really! Why not insist either explicitly (approved lists) or implicitly (higher commissions or other incentives) that the bank’s own funds be used?
Stricter compliance has made it extremely difficult for investment advisers to do what they used to do, i.e. pick individual stocks and bonds. In Canada, regulators have made putting clients into mutual funds more of a burden in recent years.
To a significant degree, mutual fund regulations have contributed to the rapid growth of ETF’s (Exchange-Traded Funds). An adviser will be confronted by a mountain of paperwork if he recommends a stock – suitability, risk, know-your-client rules) or even a mutual fund. An ETF is less risky than a stock, and can be purchased and sold more readily in client accounts by trading them in the stock markets. Independent fund companies that introduced the first ETF’s did well enough for a time but not surprisingly the banks are quickly responding by introducing their own exchange-traded funds. For example:
TORONTO, ONTARIO–(Marketwire – Nov. 20, 2012) – BMO Asset Management Inc. (BMO AM) today introduced four new funds to its Exchange Traded Fund (ETF)* product suite.
In fact, the new ETF’s launched by Bank of Montreal grew 48.3% in 2011. When it comes to the investment fund industry, go big or go home! You’d think that Claymore Investment’s ETF’s would have it made with over $6 Billion in assets under management (AUM) but alas the company was recently bought by Blackrock, the largest money manager in the world with $29 Billion under management. It will be interesting to see if the likes of Blackrock will have staying power in Canada against the banks. After all RBC has total bank assets twenty-five times that figure. Survival in the business of investment funds, and perhaps wealth management in general depends on the beneficence of the Big Five.
Admittedly, the foray of insurance companies into the investment industry has been aggressive and successful for the most part. With distribution capability and scale they certainly can compete, but the banks have a huge head start. Most insurance companies are only beginning to build out their wealth management divisions. I can see a logical fit between insurance and investments from a financial planning perspective, but then the banks know this and have already begun to encroach on the insurance side of the equation. Nevertheless I would not discount the ability of the insurance companies to capture signficant market share.
So, is it a good thing that larger financial institutions own the investment industry? Consider the world of medicine. No doubt a seasoned general practitioner will feel nostalgic for days gone by when patients viewed them as experts and trusted their every judgement. The owner of the corner hardware store no doubt holds fond memories of those days before the coming of Home Depot. Part of me wants to believe that investors were better served before the banks stampeded into the industry but I’d just be fooling myself. Although consolidation has resulted in fewer but more powerful industry leaders, the truth is that never before have investors had so wide an array of choices. Hospitals today are filled with medical specialists, while banks and insurance companies too are bursting at the seams with financial specialists.
It is not fun becoming a dinosaur, but this general practitioner has to admit progress is unstoppable.
*The industry charts are courtesy of the third quarter Scotiabank research report Mutual Fund Review. The annotations are my own.