This article was first published in the National Post on April 10, 2021. It is being republished with permission.
by Tom Bradley
The business world is in a constant state of consolidation. Customers that used to have multiple options now have two or three. In many cases, the options are owned by the same company (Fido and Rogers; Tangerine and Scotiabank, Swoop and WestJet).
Consolidation increases economies of scale, meaning costs get spread over more units or customers. In wealth management, Canada has achieved scale because of the large role the banks play in all aspects of financial services. During my career, they’ve gone from being nowhere in wealth management to dominant players.
Other firms have also bulked up. Power Corp., CI Financial and the life insurers have made numerous acquisitions to get bigger.
The importance of scale varies across segments of the industry and departments in companies. It is beneficial in operations, compliance, regulatory and legal affairs, marketing and distribution, and will likely be an advantage with the integration of big data and artificial intelligence.
Size can be a burden, however, where nimbleness and flexibility are needed. In IT for instance, making changes to a legacy computer system is like turning the Titanic. Small firms and tech-savvy robo-advisors have a big edge.
In client service, the drive for scale makes it harder to deliver a personal, customized experience. Rules around fees and tiering of services get in the way, and wait times get entrenched.
And client communications get muddier when there are many products to promote (cross selling is a constant) and no unifying investment philosophy to hold the commentary together.
For the most important aspect of wealth management — the investing — the benefits of scale also vary across parts of a portfolio. To be sure, size is beneficial in some areas. Broad market indexing has become a commodity business that is best left to the big guys and private assets, which are more labour and capital intensive, and favour firms with clout and connections.
But in many categories, investment management is an ‘anti-scale’ business. The larger the player, the fewer investments available and the harder it is to perform. This is particularly the case in small asset classes such as Canadian and small-cap stocks, preferred shares, specialized credit strategies and mid-market private equity. These asset classes are either difficult to do in size or too small to interest the big institutions. They’re better implemented by “three smart people in a room” as opposed to global, multi-location teams.
David vs. Goliath
With wealth management in Canada now dominated by Goliaths, can the Davids survive and thrive? Will there be any left a decade from now? This is something small and medium-sized firms spend time thinking about. Can we compete against institutions that are able to spread regulatory costs out over millions of clients and get the word out by inserting a flyer in a bank statement?
One of my most important business influences is Tony Hamblin, the co-founder of Hamblin Watsa (now part of Fairfax) and the early boss to many of Canada’s great money managers. When we started our business, Tony told me, “There are three things you need to focus on: people, business practices and investment philosophy. If you do that, performance and clients will take care of themselves.”
Five smooth stones
David had five smooth stones in his pouch when he took on Goliath. Non-scale firms can distinguish themselves using Tony’s three factors: attract and keep talented people; design the business around clients needs; and clearly define how they’re going to invest. The industry Davids are not underdogs in these areas.
They have a better opportunity to attract talented, entrepreneurial people who want to leave a mark. And they can keep them in place with a tight, supportive culture and by giving them a chance to be business owners.
By keeping it simple and staying focused, they have endless opportunities to set themselves apart from the big marketing machines (do you want fries with that?). I’m referring to transparency and leadership around fees, no conflicts of interest, a commitment to invest alongside their clients, and personalized, responsive service (as opposed to wait times and hand offs).
The Davids can also better align themselves with their clients by managing money the way they want their own money managed, and not trying to be all things to all people.
We’ll have lots of small and medium-sized investment firms a decade from now if they focus on things that clients value and mega-firms are incapable of doing at scale.
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