Accelerating operating costs risk capsizing the investment industry, wrote Ian Russell, president and CEO of the Investment Industry Association of Canada.
The factor that poses the greatest threat to dealer earnings and performance, and the viability of small dealers in the coming year, is the worrisome steady upward trend in operating costs driven by steadily expanding compliance costs and technology/systems applications for front and back office operations.
Technology and systems costs have been a key driver of overall cost increases, to meet both regulatory compliance demands, as well as efficiency and convenience improvements for clients of retail financial services.
This upward trend in costs will continue, with the industry facing the upcoming client-focused reforms, as well as competitive pressures to improve efficiency and convenience in the delivery of financial services.
SME dealer exits
Over the past five years, i.e. 2013-18, over fifty small and mid-sized independent dealers, many with successful niche businesses, have exited the business through amalgamation and take-overs. The pace of industry exit slowed in 2017 — with five dealers resigning their IIROC (Investment Industry Regulatory Organization of Canada) registration — likely due to a more positive outlook for the retail business and ability for technology to compensate for business scale.
In 2018, the pace of dealer exits from the business picked up with eleven dealers amalgamating with other firms or shutting operations.
“We anticipate even more firms to leave the business in 2019, given the ratcheting up in operating costs and prospect of an extended period of depressed market conditions and decelerating growth in retail and investment banking revenues,” Russell wrote. “If history is a guide, the number of independent investment dealers could fall below 100 in a year or so.”
Robo-advisor competitive pressure
Continued strong retail demand for advice and financial services boosted not just the traditional retail business but encouraged firms to respond to growing demand for online services by building out hybrid online wealth models and online self-directed discount trading models through internal investment, joint ventures, and a restructuring of existing businesses.
This has been spurred by competitive pressure from online wealth providers or independent “roboadvisors” attempting to diversify business into new customer channels, including group retirement plans, advisor and dealer partnerships. The number of advisor offerings from these fintech firms will likely continue to expand in 2019, further altering the fabric of financial advice.