As investment industry profits come under pressure, firms are struggling to find ways of boosting revenues while meeting clients’ evolving demands, a panel of executives said on Thursday.
At the Investment Industry Association of Canada’s (IIAC) annual conference in Toronto, Mario Frankovich, CEO of Hamilton, Ont.-based Burgeonvest Bick Securities Ltd., said revenue at investment firms has suffered as a result of the widespread market volatility.
“The turbulent markets have had a very negative impact on revenue,” he said.
While the industry has gone through many periods of volatility in the past, the circumstances this time have been exacerbated by the fact that costs have been rising at the same time, Frankovich said.
“We’ve had almost parabolic increases in costs,” he said, “driven primarily by regulation.”
The client relationship model (CRM) and new disclosure requirements, in particular, are pushing up costs, the panelists said.
“There’s been great focus…on providing better clarity and better information through performance reporting, through CRM, through discussion around fiduciary standard. At a high level, those are very nice thoughts. But the execution is fraught with much difficulty,” said Craig Hayman, principal, financial advisor recruiting, training and development at Edward Jones in Mississauga, Ont. “Those are very costly things to work through the system.”
Even more worrying, the panelists said, is a longer-term trend of compression of revenue streams in the industry. Specifically, the aging population and changing investor preferences, among other factors, are poised to reduce the amount of revenue the industry is earning in the long run.
“I think that is much more of an issue for us to try and deal with as dealers,” Frankovich said. “We have to go back to our revenue models, our business models, and try to understand, how does that secular trend – not the cyclical trend – impact our businesses long-term.”
The change in investor preferences is particularly concerning, according to Hayman. He said many investors, alarmed by the headlines related to the European debt crisis and market volatility, have flocked to guaranteed investment certificates (GICs) and other low-yielding products. Such products won’t likely provide investors with the income they need to reach their goals.
“We’re concerned about the preferences and the choices individual investors are making,” Hayman said.
The industry needs to adapt to these new realities, the panelists said. Frankovich said firms may need to expand their service offerings in order to secure new sources of revenue.
“We’re professionals, and we have to focus on how to be paid,” he said. “If we can identify our enhanced services, we can charge for those.”
Hayman agreed that firms have an opportunity to offer a broader spectrum of services, with a focus on holistic advice. And, he said firms need to better convey the value of advice.
“What the value of an advisor is, I don’t think is clearly articulated, or understood by clients,” he said.
As firms adjust their business and revenue models, they also need to make sure they’re keeping up with the changing demands of clients, Hayman said.
“Client preferences have significantly changed,” he said. “They want relationship management, they want planning, they want risk tolerance addressed regularly.”