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(June 23, 2003) The net number of retail broker firms in Canada has held steady over the last few years, despite a collapse in their profitability. The IDA has about 150 retail member firms at present — roughly the same as in 1999. Ian Russell, the IDA’s senior vice-president of industry relations and representation, says that’s remarkable considering as a group these firms have seen operating profit fall 19% from peak to trough. But that figure doesn’t paint the whole picture, because it includes one-time gains made from the TSX initial public offering. With those gains removed, profit actually fell 85% for these firms.
During his presentation at the 87th IDA annual meeting and conference taking place in St. Andrew’s by-the-Sea, New Brunswick, Russell declared that, “the profitability in the retail business has collapsed. In 1999 and 2000, on an annual basis, at the tail of the bull market, the retail sector was earning profits of about $250 million a year. In the last two years the profits went to zero. It’s a devastating drop.”
But Russell is quick to point out that overall retail firms continue to persevere. “That’s the most remarkable thing. Even though the profitability has disappeared, that sector hasn’t seen a substantial or even small reduction in the net number of firms. It’s a testament to these firms who have managed to survive and hang in there.”
Russell says while some firms have wound up or been bought, others have started up and the predicted wave of consolidation has not materialized. He says prospective structural change in the industry is more likely to be driven from future bank mergers.
Russell notes that while there’s been about a 3% drop in employees in the industry over the last year or so, there has not yet been a major exodus of advisors out of the business. “More typically what we’ve seen is a migration within the industry, so brokers move to other firms. But in terms of just leaving the industry, yes, down about 3% for all employees — not very significant at all.”
With respect to client assets under management by IDA retail firms, Russell says it is holding fairly steady at $700 billion. He says fee-based revenue from such products as wrap and discretionary managed accounts are up 26% in the bear market.
Mutual funds, on the other hand, have taken a pounding. Among IDA retail firms, sales of equity mutual funds are down 64% from peak to trough — with sales of all mutual funds down 54%. “There has been a real exodus out of mutual funds. And I don’t think it’s going to turn around anytime in the near future,” noted Russell.
While clients have soured on mutual funds in part because returns have fallen off “dramatically,” Russell acknowledges that other factors are at work as well. “It’s also the fact the investor is not going to tolerate the kind of management fees in that business. Back in the late 1990s, mutual funds could get away with fairly significant management fees and MERs because of double-digit returns. Investors have woken up to the fact now that those fees were not only excessive then, but they’re excessive now.”
Russell says the fund industry will respond to the pressure. “Competition will push those MERs and those management fees even lower. There’s competition coming from discretionary accounts by the dealers themselves and wrap accounts.”
While he doesn’t see investors embracing mutual funds to the degree they did a few years ago, Russell says they’re here to stay. “The mutual fund sector is going to have to change. It’s going to get more competitive, so it’s always going to have a place.”
Russell added that mutual fund commissions have held steady at an average of $1.2 billion in the past five years and that trailer and redemption fees have buttressed commission earnings for IDA retail firms over the last few years.
What do you think of these latest stats released by the IDA? Are mutual funds here to stay or will wrap and discretionary managed accounts the way of the future? Share your thoughts or ideas about this or any other industry-related topic with your peers in the Talvest Town Hall on Advisor.ca.
Filed by Darin Diehl, Advisor.ca, ddiehl@advisor.ca
(06/23/03)
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(June 23, 2003) The net number of retail broker firms in Canada has held steady over the last few years, despite a collapse in their profitability. The IDA has about 150 retail member firms at present — roughly the same as in 1999. Ian Russell, the IDA’s senior vice-president of industry relations and representation, says that’s remarkable considering as a group these firms have seen operating profit fall 19% from peak to trough. But that figure doesn’t paint the whole picture, because it includes one-time gains made from the TSX initial public offering. With those gains removed, profit actually fell 85% for these firms.
During his presentation at the 87th IDA annual meeting and conference taking place in St. Andrew’s by-the-Sea, New Brunswick, Russell declared that, “the profitability in the retail business has collapsed. In 1999 and 2000, on an annual basis, at the tail of the bull market, the retail sector was earning profits of about $250 million a year. In the last two years the profits went to zero. It’s a devastating drop.”
But Russell is quick to point out that overall retail firms continue to persevere. “That’s the most remarkable thing. Even though the profitability has disappeared, that sector hasn’t seen a substantial or even small reduction in the net number of firms. It’s a testament to these firms who have managed to survive and hang in there.”
Russell says while some firms have wound up or been bought, others have started up and the predicted wave of consolidation has not materialized. He says prospective structural change in the industry is more likely to be driven from future bank mergers.
Russell notes that while there’s been about a 3% drop in employees in the industry over the last year or so, there has not yet been a major exodus of advisors out of the business. “More typically what we’ve seen is a migration within the industry, so brokers move to other firms. But in terms of just leaving the industry, yes, down about 3% for all employees — not very significant at all.”
With respect to client assets under management by IDA retail firms, Russell says it is holding fairly steady at $700 billion. He says fee-based revenue from such products as wrap and discretionary managed accounts are up 26% in the bear market.
Mutual funds, on the other hand, have taken a pounding. Among IDA retail firms, sales of equity mutual funds are down 64% from peak to trough — with sales of all mutual funds down 54%. “There has been a real exodus out of mutual funds. And I don’t think it’s going to turn around anytime in the near future,” noted Russell.
While clients have soured on mutual funds in part because returns have fallen off “dramatically,” Russell acknowledges that other factors are at work as well. “It’s also the fact the investor is not going to tolerate the kind of management fees in that business. Back in the late 1990s, mutual funds could get away with fairly significant management fees and MERs because of double-digit returns. Investors have woken up to the fact now that those fees were not only excessive then, but they’re excessive now.”
Russell says the fund industry will respond to the pressure. “Competition will push those MERs and those management fees even lower. There’s competition coming from discretionary accounts by the dealers themselves and wrap accounts.”
While he doesn’t see investors embracing mutual funds to the degree they did a few years ago, Russell says they’re here to stay. “The mutual fund sector is going to have to change. It’s going to get more competitive, so it’s always going to have a place.”
Russell added that mutual fund commissions have held steady at an average of $1.2 billion in the past five years and that trailer and redemption fees have buttressed commission earnings for IDA retail firms over the last few years.
What do you think of these latest stats released by the IDA? Are mutual funds here to stay or will wrap and discretionary managed accounts the way of the future? Share your thoughts or ideas about this or any other industry-related topic with your peers in the Talvest Town Hall on Advisor.ca.
Filed by Darin Diehl, Advisor.ca, ddiehl@advisor.ca
(06/23/03)
