Cost containment a priority for Canadian wealth managers

Significant spending on technology and compliance is forcing wealth firms to find other ways to trim expenses

Cost containment a priority for Canadian wealth managers
As Canadian wealth firms face increasing regulation and pressure to compete through technology adoption, cost minimization has become a major concern, according to IIAC president Ian C.W. Russell.

Efforts to minimize expenses in other ways have successfully contained growth of operational costs in 2011-2015 at 2% per year. Some technology investments have resulted in improved efficiencies in operation and rule compliance. Firms have also attempted to reduce staff, but could only cut so much given the need for sales staff and compliance personnel among many shops.

That has forced a downward adjustment in advisor payouts, particularly among firms with lower levels of gross revenue. “[I]n recent years the payout percentage at several large integrated firms moved sharply below the 50 percent threshold to the 20 percent range for gross income of roughly $500K, with the percentage remaining in the 50 percent range for higher gross revenues,” Russel wrote in an open letter, though he added that even firms at higher income levels are putting pressure on payouts.

Small and mid-sized firms have thus been forced to attempt a difficult balancing act: keep payouts high enough to retain existing advisors or recruit more talent, but allocate enough of the revenue to attract investors and build scale through capitalization. Since efforts to adjust payouts have been made industry-wide, smaller firms have a little bit more room to make the necessary adjustment while maintaining competitiveness, though not much.

Some mid-sized independent firms have also adjusted payouts indirectly: while payout percentages were not revised downward, advisors were given the responsibility of sharing in costs that could include technology, compliance, infrastructure, and staff-related expenses.

The need to make sufficient net income has also caused firms to focus on performance. Aside from improving client access to products and advisory services, providing a full range of products and advisory services, and balancing fee-based or discretionary management and valuable financial planning and tax expertise, firms are also facilitating smooth transitions from older retiring advisors to younger ones with new approaches to wealth management.

“We are optimistic smaller firms will be successful containing operating costs and boosting revenue through innovative wealth management techniques and productivity enhancements,” said Russell.

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