Oct 2012 8

Financial Crisis Threatening Wealth Management Firms

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Around the World by Rachfog Around the World by Rachfog

Last week, the Financial Post posted an article about Canaccord Financial closing down half of its offices. Although it’s not the biggest company, with offices in 12 countries and over 60 years on the market, it’s not a small company either. Therefore it might be interesting to consider how the financial crisis in 2008 and following years of uncertainty impacted companies focusing on wealth management around the world and in Canada.

Canaccord’s Story

Canaccord is one of leading independent full-service financial firms focusing on both wealth management and capital markets with $13.1 billion under its management. Until recently, it operated 32 branches around Canada. Although it produced $3.7-million in pre-tax net income on a revenue of $199.3-million last fiscal year, its profits have been falling in 2012. In 2011, Canaccord’s pre-tax income was $12.4 million and in 2010 the number was even higher, at $27.7 million. This trend of decreasing profits resulted in red numbers last quarter with a loss of $20.4 million. The net loss was a little lower, but even $16.3 million is too much.

The firm was strongly hit by the financial crisis in 2008 and subsequent sovereign debt crisis in Europe. With fewer transactions, income fell and retail banks entering the wealth management market made competition fiercer. The other problem was that clients lost some money in bad investments advised by the company. This harmed its reputation. In the case of ABCP, the Investment Industry Regulatory Organization of Canada (IIROC) imposed a $3.1 million fine and also required Canaccord to submit to an independent review of its procedures for complying with securities regulations. This doesn’t help you much if your operations are based on the trust of your clients. However, the truth is that Canaccord wasn’t the only company facing problems with regulators. Seven other banks and investment dealers were involved as well. National Bank Financial had to pay $75 million in the same case.

Analyst by Marvin Kuo Analyst by Marvin Kuo

Analysts were awaiting reorganization for several months. In the beginning of September, a change in leadership was announced. Alexis de Rosnay, the new CEO, made it clear from the beginning that he wanted to focus on strengthening the company’s global operations. This makes sense since margins for example in Great Britain, because of the larger fee-based component on revenues, are much higher. The company will decrease its number of branches and investment teams in Canada, but will expand abroad. On September 29th it announced acquisition of UK boutique wealth manager Eden Financial. The firm, which currently has £835m of assets under management, will be integrated into existing wealth management platform Collins Stewart Wealth Management. After the acquisition, the whole platform will account for £9 billion.

Situation Around the World

The case of Canaccord illustrates the ongoing transformation of the whole wealth management industry. Reading one of the older reports from 2008 made by Boston Consulting Group might be quite amusing (provided you don’t work for one of the banks), as they claimed that wealth management managers “have been spared a direct hit by financial crisis.” It was shortly before the Lehmann Brothers announced bankruptcy. The real development differed considerably from their initial forecasts and the name of the article, Wealth Management Industry in Crisis, says it all. Another survey made by Booz&co. concludes the same.

Between 2007 and 2009 profits fell in the industry by 75 per cent and just in 2011, the global financial industry closed approximately 200,000 job positions. As Jason Kennedy, CEO of Kennedy Group, a recruiting firm based in London, said: “I have never seen it as bad. The future of the profession is bleak.”

Big Players Are Entering

Big Players Are Entering by Lauren Big Players Are Entering by Lauren

As mentioned before, Canaccord is trying to become more global. This makes sense not just because it can better diversify its operations and to some extent achieve economies of scale, but it will also give the company some space for breathing. In Canada it has a hard time competing with banks that want to enter the wealth management industry. These deep-pocketed competitors are pushing smaller independent companies out of the market. GMP Capital Inc., other large independent dealers in Canada, reported a loss for the most recent quarter. According to GMP Capital, investor caution and an unstable economic environment caused lower trading and underwriting fees. This spring The Economist analyzed a new trend among banks. Until recently, only a handful of boutique, investment banks, and independent firms were focusing on wealth management. But now big retail banks also want their piece of the pie. Last year around 122 trillion USD was in the game. To get even a small chunk of this it is very tempting.

Is There a Future for Independent Firms?

Certainly, there is. Independent financial advisors with smaller risks of conflict of interest still have a good chance to retain their clients. But to do so, they need to be able to match banks in ability to offer complex financial service. To do that, they have to be big enough and preferably also operating on all major financial markets. The other option is to specialize in a niche group of clients or portfolios. WealthFront specializing on Silicon Valley investors or MarketRiders, an online portfolio assessor, belong to the second group. It seems that Canaccord wants to enter the first group.

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