I understand “location, location, location” in the real estate business.”  What I don’t get is “scale, scale, scale” in the investment business. 

But “scale” is the word of the week in our industry.  Both Rick Waugh, the CEO of Bank of Nova Scotia, (“We’ve got to get more scale”) and Bill Holland, his counterpart at CI Funds (“We believe that this is a bulge bracket game”) talked about it.  They made it sound like their wealth management businesses are at risk if they don’t get bigger. 

Interestingly, the two firms come at the scale issue from very different perspectives.  CI runs a tight ship and has grown its business aggressively.  Acquisitions are a key part of their strategy and they’re really good at doing them.  They move fast to integrate the new firm, find the redundancies and squeeze the costs out.  From a business management perspective, CI is a Canadian success story.

While BNS is also a success story (as this week’s earnings report attests), they have been a laggard in wealth management.  And on the acquisition front, they have yet to consummate a meaningful deal, despite the fact that they are desperate to grow this area of the bank.  They wear that desperation on their sleeve, even though they are starting to gain some momentum and have recently been making up ground on the competition.

What’s interesting about Bill and Rick’s yearnings is that investment management is one of the few businesses that gets worse with size, not better.  The more assets portfolio managers are given to run, the harder it is for them to succeed.  Certainly in the Canadian context, a large fund manager is limited to acquiring meaningful positions in less than a hundred stocks (meaningful in terms of impacting client performance) and the ones they can buy sometimes take weeks or months to purchase.  When it comes to fund performance, there is no evidence that clients benefit from scale.

And there has been little evidence that fees come down as a result of the mega-firms’ cost cutting.  Consider that the Investors Group Dividend Fund, Canada’s largest fund ($13 billion) from Canada’s second largest fund company ($102 billion), has an MER of 2.69%.  The leaders on fees are the small firms, not the big ones. 

The push for “scale, scale, scale” is an example of where the investment profession has lost out to the profit and growth imperatives of the investment business (see The Investment Profession-versus-business Tug of War).   It is clear, the shareholders are more important than the unitholders.