Small- to mid-sized investment firms face a battle for survival because of compliance and fee pressures.
That’s the view of Joseph Micallef, national tax leader, financial services, KPMG, who said increasing pressures around regulatory compliance and penalties, fees and the commoditization of products like ETFs are negatively impacting businesses.
Making reference to his firm’s Canadian Asset Management Industry Opportunities and Risks Report, which put regulatory compliance as the top organizational risk in 2018, Micallef said the biggest challenge for small- to medium-sized industry players is scalability.
He said: “Unless they can achieve a certain amount of scale to obviously offset the cost to be compliant and competitive on the pricing side, it’s going to be extremely difficult for them to survive.
“I think there’s a very high possibility of M&A activity and of at least joint ventures or partnerships with others. Other asset managers or partners can certainly help on the compliance automation side to offload some of the CapEx or other internalized expenses that would have resulted if they did it themselves.
“I truly believe these are some of the key decisions for evolution that these managers are going to have to make in order to survive in the long run.”
With regards to compliance, KPMG’s study found that sentiment was more positive among advisors that they were going to be able to survive – and these results were accumulated before the CSA announced its latest set of best practice proposals.
James Loewen, KPMG's asset management sector leader for Canada, said that while compliance is obviously still top of mind for money managers, the Ontario government’s blanket refusal to accept the CSA’s bid to ban fund managers from making certain commission payments to dealers has muddied the waters further.
He said: “The fact the CSA did not go as far as they could have on best interests, that probably helped a little bit but it is absolutely a substantial concern for small, mid and large players in the industry.
“Everything we know suggests we are not going to have full best interest. Whatever form it takes, it’s certainly going to be challenging to implement, so people are definitely worried.
“On embedded commissions, I think most people in the industry kind of knew where we were headed – we weren’t headed to a full ban; there was going to be parameters put around what could be done, especially looking at conflict of interest and suitability.
“But who knows now [with the Ontario government’s opposition] – I think that’s going to be challenging because the industry probably doesn’t know where it’s headed and I doubt the Ontario Securities Commission does either. So we’re going to have to let that play out a little bit.”
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