Industry Now at a Critical Juncture. Ian C. W. Russell CEO & President IIAC

Transcription

1 Industry Now at a Critical Juncture Ian C. W. Russell CEO & President IIAC

2 Factors Driving Industry Change I. Protracted Weakness in Profitability II. Pessimism III. Regulatory Burden IV. Competition V. Strategic Industry Adjustments VI. Limited Financial Cushion at Boutiques 2

3 I. Protracted Weakness in Profitability Average industry operating revenue and profits in five years ended 2012 are 5% and 25% below pre-crisis levels No sustained rebound since 2008 financial crash 3

4 Operating Revenue and Profit Industry $M 4

5 I. Protracted Weakness in Profitability Boutiques struggle Operating revenue and profit down 17% and 47% on average in past five years 2012 revenue down 20% year-over-year 2012 profit down 44% year-over-year More than half the boutiques losing money in Q3 5

6 Operating Revenue and Profit Boutiques $M 6

7 Operating Revenue and Profit Boutiques $M 6,000 5,000 4,000 3,000 2,000 Operating Revenue Operating Profit 1, Annualized 7

8 Firms with Profits and Losses Profits Losses 0 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

9 Operating Profit Integrated v. Boutiques $M 9

10 $M Operating Profit Integrated v. Boutiques 10

11 $M Difference in Operating Profit Integrated v. Boutiques 11

12 $M Operating Revenue Integrated v. Boutiques 12

13 $M Difference in Operating Revenue Integrated v. Boutiques 13

14 Return on Equity Integrated v. Boutiques Per cent 50 Integrated 40 Boutiques Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4* Q1 Q2 Q3 Q4 Q1 Q2 Q * Adjusted for non-recurrent extraordinary income 14

15 Performance of Business Lines 15

16 Retail Revenue $M 16

17 Operating Revenue and Expenses Retail Boutiques $M 17

18 Investment Banking Revenue $M 18

19 Operating Revenue and Expenses Institutional Boutiques $M * Adjusted for non-recurrent extraordinary income 19

20 Common Equity Financing 20

21 Common Equity Financing $M 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Annualized 21

22 Common Equity Financing less than $20M $M 22

23 Common Equity Financing less than $20M 23

24 IPOs less than $20M 24

25 $M IPOs less than $20M 25

26 II. Pessimism Greater pessimism about economic and financial outlook No evidence in financial markets of imminent turnaround 26

27 Pessimistic Outlook on Economy Q: Do you believe the global economy will improve, stay the same, or decline over the next 12 months? Don't know 4% Improve 15% Decline 48% Stay the same 34% Base: All respondents (1,258) Source: PwC 15 th Annual Global CEO Survey

28 Indicator of Retail Sentiment for Equity Markets $B Source: IFIC 28

29 III. Regulatory Burden Ratcheting up the regulatory burden CRM gradual phase-in of CRM requirements 2013 for new clients; 2014 for existing clients Fiduciary standard 29

30 Rules Announced Past 6 Months AMF Compensation of consumers of financial products and services BCSC Disclosure for Dealers Trading Securities on the Over-the-Counter Bulletin Board (OTCBB) CSA Client Relationship Model (CRM) Performance Reporting Rules CSA Point of Sale, Stage 2 CSA Pre-Marketing of Prospectus Rules CSA Prospectus Exemptions IIROC CSA Transparency of Short Sales and Failed Trades IIROC Dark Pools Rule IIROC Date of Offering Guidance IIROC Electronic Trading IIROC Manipulative and Deceptive Trading IIROC Marketplace Thresholds IIROC Circuit Breaker Rules IIROC CRM Rules IIROC Notice on Compensation Structures IIROC Notice on Cost of Borrowing IIROC Off-Marketplace Trades 30 IIROC Restricted Dealers IIROC Rules of Enforcement IIROC Short Sale and Failed Trades Rule IIROC Short Sale and Short Marking Exempt Guidance IIROC Study on Portfolio Managing Regime MXRD Large Open Position Reporting Changes MXRD Changements apportés à la publication des exigences de marges sur contrat à court terme OSC Expansion in Fund Disclosures to Closed- End, Redeemable and Other Funds (expected 2012) OSC Mutual Fund Fee Study (intend to announce related details by year-end) OSC Proposal on Fee Increase OSC Work/Study of a Fiduciary Duty OSC-TMX Normal Course Issuer Bid Rule

31 IV. Competition Steady competitive tempo for pricing and services in wealth management and institutional business Integrated firms encroach on boutiques EMDs encroach on the boutique capital raising business 31

32 Revenue Share Industry Total Revenue 2007 YTD 2012 Boutiques, 35% Boutiques, 26% Integrated, 65% Integrated, 74% 32

33 Revenue Share Retail Revenue 2007 YTD 2012 Boutiques, 30% Boutiques, 26% Integrated, 70% Integrated, 74% 33

34 Revenue Share Investment Banking 2007 YTD 2012 Boutiques, 42% Boutiques, 26% Integrated, 58% Integrated, 74% 34

35 Fixed Income Revenue Integrated Firms $M 35

36 $M Revenue Comparison Retail Boutique v. Integrated Fixed Income 36

37 V. Strategic Industry Adjustments Weak conditions force change in business models Large Firms Strategic acquisitions - Cross-subsidize retail business to retain and attract advisors - Pull top brokers with large books from small firms Off-load weak performing assets - Scale back capital market and wealth management businesses - Acquisition opportunities for smaller firms Cost-cutting - General cost reductions - Pare back low-performing brokers - Advisor migration to independent firms 37

38 V. Strategic Industry Adjustments Weak conditions force change in business models Small Firms Mergers, sales, wind-ups - Ongoing losses force sale of business units or full operations - 17 significant boutiques merged or wound-up in Cost-cutting - General cost reductions - Cut advisor payout percentage as costs rise - Migration of top advisors to large firms Build scale - Through acquisition of advisors and small firms More Reliance on Carrier Brokers - New products (fixed income, structured products) and services (planning) - Compliance expertise and technology (enhanced suitability requirements) 38

39 Fixed Costs % of Total Expenses 80% 75% 70% 65% 60% 55% 50% 45% Boutiques Integrated 40% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q

40 Operating Cost per Dollar Revenue Integrated v. Boutiques 40

41 IIROC Membership # Resigning Firms Number of Firms 41

42 V. Strategic Adjustments Accelerated client migration to larger firms Increased incidence of life-changing events triggering client migrations Need for new services (financial and estate planning) Custodianship is client priority 42

43 Client Cash Holdings Boutiques $B 43

44 Boutique Share Cash Holdings 44

45 VI. Limited Financial Cushion at Boutiques Limited retained earnings High proportion of boutiques earn low revenue Impacted by business slowdown Limited diversity in revenue to seize developing opportunities and cross-subsidize weak businesses 45

46 Retained Earnings $B Integrated Boutiques YTD 46

47 Retained Earnings Boutique s Share of Industry Total 40% 35% 35% 30% 30% 25% 25% 20% 22% 15% 10% 14% 12% 5% 0% YTD 47

48 Breakdown by Revenue 99 firms with less than $20 million in annual revenue Revenue in 2011 Number of Dealers % Industry Revenue More than $20M 52 dealers 96% $10M-$20M 22 dealers 2% $5M-$10M 25 dealers 1% Less than $5M 52 dealers 1% 48