While integrated dealers have outperformed independent firms in revenue throughout the post-financial crisis, it’s the independents that have surprised everyone in the past five years with overall profit nearly doubling, says the president of the Investment Industry Association of Canada (IIAC).
In a recent President’s Letter, Ian Russell forecast that the wealth side of the industry is expected to stay strong as Baby Boomers move into retirement with a demand for wealth products and services and Millennials who will account for a growing share of income and savings.
Private equity and derivatives
While some firms may focus on high net-worth clients, Russell said it’s the independent firms that have been able to access alternative investments, such as private equity and derivatives. They have also been able to put in place technology products and tools for all client segments at a reasonable cost to compete effectively in the marketplace, he wrote.
Russell said he’s optimistic the independent dealers will thrive in what he called the “most challenging markets ever confronted by the industry.”
“The vigour of these firms in the marketplace, and the unique product and service mix they provide, will bring significant benefits to investors and corporate issuers, especially small business, and contribute importantly to the health of the economy and capital markets.”
Success and staying power
The real story, says Russell, is the success and staying power of independent retail firms in the face of changing demographics, expanded products and services and higher compliance costs.
“The independent firms have three positive factors to their advantage: strategic vision focused on niche businesses; strong retail markets to boost revenue at retail firms and enhance distribution at institutional dealers; and access to emerging technology to ramp up retail services and lower operating costs,” Russell wrote.
The independent retail dealers have proven effective competitors in the retail markets, even against the much larger integrated firms with the edge in product range and business scale.
The millennial investor base
“The challenge for the independents will be adjusting business focus towards the growing influence of the millennial investor base, deploying the right technology applications to meet customer demand and improve operating efficiencies, keeping a tight focus on overall costs and managing advisor training, transition and compensation arrangements.”
Other firms may not be as lucky. Russell predicted that investment banking revenue is more likely to decline from its current levels than increase, mainly because of financing activity in the resource sector. The small- and mid-cap sectors, he said, will be more susceptible to weaker business conditions and less likely to expand operations than larger companies.