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Times are good for investment dealers in Canada — earnings have increased more than 58% in the past three years and operating profits are at all-time highs. Wealth management businesses have set new records and institutional businesses are also posting strong results, business models are evolving and the industry has adapted, squeezing high earnings out of their operations.
That’s the state of the industry as described by Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC, formerly the IDA — Industry Association) in his yearly roundup of facts and figures.
Interestingly enough, the infrastructure underpinning the industry’s growth has remained relatively unchanged over the years. Earnings are up significantly, but the number of firms in the industry has remained relatively stable. Currently there are 190 firms in Canada. That number has gone up in the past three years, but only slightly, and the number of people employed in the industry has remained relatively consistent at 37,000.
“We’ve been very cautious about expanding into this booming business,” says Russell. The growth has come from the use of more sophisticated technology applications that allow firms to deal with more clients and more transactions, thereby increasing annual revenue growth rates per employee. Unit costs have fallen and the average increase in assets under management per registrant, he says has increased 8.5% over time.
This is a good thing obviously, but there are also a number of resulting challenges that the industry needs to deal with. Russell says brokers are under-pricing their services and not targeting clients as efficiently as they could be, and the greater focus on products, particularly for high end clients, is highlighting the need for more brokers to start segmenting their clients — a trend that Russell says firms will certainly be more focused on in the future.
Brokers also need to spend more time with clients, Russell added. Not only are products more sophisticated, more than $2 trillion invested with unregulated hedge funds globally has injected a new variety of volatility into capital markets. “It’s been a rough quarter and it’s not going to be the greatest summer,” he says.
But there are still a number of positive trends that will help investment dealers. Fee-based products and services are growing in popularity in the industry. This greater dependence on wealth management and fee-based revenues will make the business less cyclical than it has been in the past. Dealers are capturing more household business than ever before, both high end and retail assets, and mutual fund commission revenues are also growing, thanks to increased innovation in the mutual fund industry and the wide array of new packaged products becoming available to target the mass market.
As well, the dealer industry has been helped in the past few years by the active IPO market for energy and income trusts. Where business in the U.S. experienced a significant retrenchment following the tech bubble blowout, the IPO market resulted in a very different pattern of performance for Canada.
This year, Russell says he is bullish and optimistic about the future and continued success for investment dealers, saying there are still refinements to be made that will allow dealers to continue squeezing earnings out of their operations, but adds that there are a number of factors that need to be considered if the industry is to maintain any of that momentum.
“These are the best three years this industry has ever had,” he told conference delegates. “I think we will continue to see good earnings going forward but not at the levels we’ve seen in the past three years.”
Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com
(06/28/06)