Wealth industry sees overall profit, but some firms struggle

Challenges are more significant for small and mid-sized boutiques, according to industry group head

Wealth industry sees overall profit, but some firms struggle
Headwinds faced by the Canadian wealth management sector have not prevented its overall profitability, though they are affecting some segments, according to IIAC President Ian C.W. Russell.

In recent years, the burden from regulatory obligations – such as CRM1 and CRM2 frameworks, US tax-reporting rules (FATCA), anti-money laundering rules, anti-spam rules, and privacy legislation – has been steadily increasing. “The rule-making is expected to continue its frenetic pace in the foreseeable future, led by the CSA’s ‘targeted’ reforms, including a proposed best interest standard and possible elimination of embedded fees,” Russell said in an open letter.

There is no regulatory requirement with regard to upgrading technology, but it remains a concern for firms that want to be competitive. “[D]emand for technology will be relentless as the business continues to innovate, improving real-time access and account information to the client and back-office efficiencies for the firm,” he said.

Despite these challenges, the industry overall has performed well. Retail revenue rose by an average of 6% annually in 2011-2015, comfortably leading operating cost increases that averaged 2% over the same period. Portfolio valuations have been pulled up by rising Canadian and US stock market indices, which have pulled up fee income as well. A growing pool of aging investors, either approaching or growing late into retirement, is also foreseen to sustain demand for financial services.

The sector may have shown solid performance, but it has not been even across firms. The retail business of integrated firms has done well due to their scale, rapid technology adoption, and prudent cost management. However, while large independent retail firms have managed to achieve fairly good earnings, small and mid-sized firms have been unprofitable. “The poor performance of these smaller retail franchises suggests difficulties in containing costs and growing revenue,” Russell said.

These poorly performing firms have become the focal points for structural change: 36 retail firms have resigned from IIROC since 2011, while 30 other small retail boutiques are under significant earnings stress. Such firms are likely to either close shop or get acquired by larger players.

“Regulators must slow the pace of future reform to bring a proper cost-benefit assessment to the rule-making process, avoiding unnecessary compliance costs and limiting unintended consequences,” Russell said, calling for efforts to contain or rationalize compliance costs.

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