Although the investment industry continues to lose securities dealers in the face of competitive pressures and rising costs, certain firms are demonstrating what it takes to be resilient in a challenging environment, said Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC), at an event in Toronto on Thursday.
"A core group of smaller firms, a critical mass of some 70 to 80 firms have built strategic niche businesses, cut operating costs to the bone and adapted technology to compete effectively and compensate for lack of scale," said Russell during a speech at the Empire Club of Canada's annual investment outlook, at which he presented the results of the IIAC's 2016 survey of investment dealer CEOs.
In developing these niche businesses, these smaller firms are focusing on specific areas in which they have a competitive advantage in expertise and client relationships, according to Russell.
Overall, CEOs are optimistic about their retail businesses, which they say will remain the largest contributor to their revenue in 2017.
In fact, 62% of investment dealers' revenue in 2015 came from the wealth-management side of the business, with investment banking being the second most popular source of revenue, at 18%, according to the IIAC's research.
There are particular demographic shifts that are driving the wealth-management side of the business, Russell said.
"The retail business benefits from an aging population. Demands for services such as financial and estate planning will escalate," he explained. "Over the next decade, we will see the largest intergenerational wealth transfer in Canadian history. And the amount will grow even larger in subsequent decades."
Changing demographics is also leading to a younger, millennial investor and the IIAC asked dealer CEOs for their thoughts on the effects that robo-advisors will have on their businesses.
CEOs are overwhelmingly positive on the matter. Approximately two-thirds of CEOs feel that robo-advisors have a complementary impact on their businesses. Furthermore, 40% of CEOs say these automated investment tools are important to building relationships with younger clients while another 40% believe robo-advisors are helpful in serving clients with lower levels of investible assets.
Still, the investment industry has seen challenges in recent years and is becoming smaller as a result. More than 60 boutique firms have closed down since 2012 and 50 existing firms are currently losing money, Russell noted.
The IIAC's research indicates that more than half (55%) of CEOs anticipate that the number of firms that will exit the industry will grow in the next two years and likely be greater than the 22 firms that closed their doors in the past two years.
CEOs also shared their thoughts on the major cost pressures facing their businesses, with 70% saying compliance expenses take the top spot, which is an unsurprising finding considering the "significant ramping up in compliance requirements to meet an expanding rule book," said Russell.
About two-thirds (65%) of CEOs say their dealers expect to spend more on technology in 2017 than they did in 2016 and 35% expect to spend about the same amount. Similarly, 60% of CEOs indicate their firms' technology spending toward cybersecurity efforts in the next two years will exceed that of the previous two years and 30% say they are focusing their technology budgets to streamline processes in their front and back offices.
"Smaller firms have focused on these technology applications to reduce costs and compensate for lack of scale," Russell explained.
The IIAC's survey was conducted from Nov. 3–25, 2016, and includes the responses of CEOs of the association's 132 dealer member firms.
Photo copyright: macfromlondon/123RF