Implications of convergence
Both clients and advisors impacted
The mid-1990s saw the beginning of a trend that continues to sweep Canada's wealth management industry. The trend: the convergence of financial product manufacturing and distribution. It's actually an old trend that gathered steam amongst a relatively new group of industry participants. There are unique impacts for both financial advisors and the industry's end clients.
I've said before that distribution is to financial services what location is to real estate - it's critical. Hence, it's no surprise that Canada's largest financial product manufacturers - i.e. banks and insurance companies - have a long history of using their well established distribution networks to sell their products.
Relatively new is the evolution of financial advisory firms with "independent" roots into larger integrated firms - a model once criticized for its lack of independence. Back in 1995, the Equion Group (an investment dealer) and Loring Ward Investment Counsel (a money management firm) joined forces. It was the birth of Winnipeg-based Assante Corporation.
It was the first significant shift, among Canadian independent advisory firms, toward providing a product manufacturer with preferred access to a distribution network. Even Assante has long been the subject of criticism by many industry observers and competitors. But now, the saying "if you can't beat 'em, join 'em" seems appropriate.
Firms like IPC Financial Network and Cartier Financial Partners are more recent followers of this trend - having created proprietary products to boost profitability only after establishing themselves as distributors.
Another recent trend is for already successful product manufacturers to build/acquire large distribution networks. The emphasis on using the distribution subsidiaries to drive proprietary product sales varies widely. The most recent of this trend is CI Funds, which recently announced a deal to acquire the Canadian operations of Assante Corporation. The motivations of this deal seem clear.
When CI acquired the fund assets of Spectrum and Clarica last year, distribution was a big factor as this press release notes, "CI will also receive preferred access for its products to more than 4,000 Clarica agents and managers." It seems that this was also a key motivation in the purchase of Assante. Why?
While product manufacturers are more profitable than distribution firms, there is an indirect potential synergy as noted in CI's "preferred access" statement above. Perhaps Assante said it best. Page 12 of its IPO prospectus dated May 19, 1999 states, "With the proliferation of products and services in the market and the rising costs of competing for market share in an environment where products and services were becoming increasingly commoditized, Assante observed a trend towards manufacturers competing for control over traditional and non-traditional distribution channels. Assante believed that, to survive in the manufacturing industry, the key was to partner with established distribution arms with an extensive base of advisors and clients."
Impact of this trend
It is important to distinguish between actual and perceived impact. Some firms who have married product manufacturing with distribution show no tendency toward the "strong encouragement" of its distribution force to sell proprietary products. In such cases, I'm not sure there is any real impact for either advisors or their clients.
A contingent of advisors who passionately value their independence will surely survive this convergence trend with their independence intact. The industry will cater to this group in some way to provide the independent home they so fiercely crave.
In the case of firms who have a more clearly stated goal of using distribution to enhance profitability of product manufacturing segments, the challenge is greater. Advisors with these firms will have to battle both the perception and the existence of potentially heightened conflict. If pressures exist to sell in-house product, the quality of their advice may be called into question.
Clients of such firms will need to become increasingly aware of this to properly assess their advisor's advice. In all likelihood, the regulatory environment will also evolve accordingly to deal with the changing landscape, which may also highlight the issue for consumers to some extent.
The bottom line is that independence isn't necessarily a factor of one's environment. It can be, but ultimately the individual advisor determines the quality and independence of the advice delivered to clients.
At the same time, the history of many industries clearly demonstrates that this sweeping wave of consolidation will eventually pave the way for innovative advisors and firms to carve out a niche ignored by larger trends. Advisors will have to figure out where they fit in once the dust settles - and that may well determine their subsequent success.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at email@example.com
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