Surviving the consolidation game

Advisors need to move to the client experience business.

“We all have to get out of the product business,” said Chris Reynolds, president and CEO of Investment Planning Counsel Inc., speaking at the Advisor Group’s 2011 Distributors’ Conference in Niagara Falls.

Otherwise, advisors won’t be able to differentiate themselves from the masses.

As for the distribution industry, dealers need size and scale to compete, but most importantly, a dealer without product manufacturing capability is not a sustainable model.

“They have to add value to the overall relationship,” he said. “All that will lead to consolidation, a natural evolution of any business. We have a rapidly growing industry [where] a lot of players get involved because the barriers to entry and costs are low.”

This leads to the next step: maturity. And that’s when companies start to compete. This is the current state of the game, said Reynolds.

Going forward, regulatory factors will hold greater sway. “I’m all for regulation so long as it protects the consumer,” said Reynolds. “I am against regulation for the sake of regulation.”

The cost of regulation over the past few years has gone up tremendously, and there’s no sign the trend will reverse. Reynolds does see some light at the end of the tunnel — from the proposed national regulator. “It is a good thing for all of us,” he said, since elimination of duplication among regulators will drive down costs.

IIROC versus MFDA

There is a constant debate over IIROC registration versus the MFDA registration. Reynolds feels the merger of the two is inevitable. “We pray to two gods; we’d rather pray to one,” he said. “As more and more firms have both platforms, it would make more sense to merge the two regulators.” Only those who don’t have an IIROC platform will disagree, he added.

The industry has been witnessing a migration of younger advisors who are building their books. They are now moving to the IIROC platform, making it more difficult for the pure MFDA platform to attract high-growth young advisors.

“Ours is a low-growth market and aging advisors are the reason for it,” said Reynolds. Few will disagree that when advisors hit a certain age, and certain book size, their ambition somewhat wanes. And then there are advisors who refuse to retire.

“The challenge we all face with an aging advisor base is that they don’t want to change the way they do business,” he said. “Some of them don’t even have a computer in their office.”

Advisors who are most adaptable to change will survive. “The next round of M&A should be young advisors buying old advisors’ books,” predicted Reynolds.

Competition heating up

Two years ago, there was hardly any competition in the market, but there’s plenty now. This competition is not only coming from banks, but also from younger advisors.

“[Technology such as the] Internet will change competition for our industry,” he said. “It will allow [consumers to] compare the services of one financial advisor to another in a transparent manner. Then only the companies that offer a superior service for the same price, or in some cases less, will gain market share.”

Consumer demand has not gone down for advice. Survey after survey says one thing: Canadians want advice. “But what they really want out of their financial advisor [is] a great experience,” said Reynolds.

The industry, however, is trained to give them products — there are over 10,000 mutual funds available in Canada today.

“The company that gets its act together by providing great client experience will be the winner in the consolidation game.”

Reynolds points to a spectrum with survivors positioned on the two extremes. On the one end are the mega-firms with deep pockets. On the other extreme are the niche shops.

“Niche is not small; they are servicing markets that people don’t want or understand. Niche players will continue to thrive.”