Stiff competition means asset managers ‘can no longer be picky’

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Canada's biggest asset managers try to be selective when bringing on new clients, searching for those with the fattest margins, but the domestic market is now so saturated that a new strategy is necessary, according to RBC Dominion Securities analyst Geoff Kwan.

Because bond and equity markets are performing so well, asset managers are back in favour as investment opportunities. Until now they've rode the hot markets, which churn out better money management fees, but drumming up extra growth is hard to do at home because so many firms chase the same high profile clients and business lines.

Given the heavy saturation, Mr. Kwan believes money managers must change their game plan, and warns that investors should embrace the shift.

"In a continued challenging and highly competitive asset gathering environment, investors should understand that asset managers can no longer be picky about turning down new business because of lower margins," he wrote in a note to clients. Mr. Kwan reached this conclusion after meeting with the country's biggest asset managers, a series of one-on-ones that helped him size up the market.

"Instead, embracing a strategy of gathering new assets so long as it can be done profitably (despite potentially being margin dilutive) is required to be successful," he wrote.

In other words: if you add enough low margin clients, you can still boost your bottom line.

Sitting down with the likes of Bank of Nova Scotia, Bank of Montreal, Manulife Financial Corp., IGM Financial and Fiera Capital, also gave Mr. Kwan a taste for the industry's dominant themes.

Exchange-traded funds continue to be hot, but there are concerns this asset class will face even more pressure to slash fees – despite already being low-cost relative to mutual funds. The potential cuts have implications for money managers such as BMO, which do not have the same ETF scale as giants like Blackrock.

As for acquisitions, the best opportunities are bound to come from beyond Canada's borders, with many firms targeting the U.S., Asia and Latin America. Because the market here has turned a corner, it's suddenly very expensive to buy a wealth manager.

However, a meeting with Investor Economics, which tracks wealth data and trends, made it clear that there is still substantial money to be made here – but the money managers might have to tweak their offerings.

"Investors still have high levels of cash despite good market performance which could suggest investors are continuing to demonstrate risk avoidance that there may need to be a greater need for risk management products," he wrote.