What's Happening to all the Wealth Management Firms?

What's Happening to all the Wealth Management Firms?

The recent acquisition by Scotiabank this week is the third major wealth management acquisition in the last few months which saw Jarislowsky Fraser and CGOV get swooped up. Scotiabank in particular is really trying to boost it’s wealth management presence as it has spent $3.5-billion in the last few months to purchase Jarislowsky and MD Financial Management.

 

In the last year or so, many of Canada’s wealth management firms have hit the spotlight and this is directly related to the MASSIVE generational wealth transfer that is going to be taking place in many G-related companies. (G is Group of).

  1. Finally focusing on the “young people” market

For the longest time I have advocated that one of the things big company’s needed to focus on is products and services designed for young people. And I think we may finally be seeing that but in a very lucrative and indirect way. Essentially what the banks have done is acquire the biggest asset that many young people have and that is the inheritances and wealth transfers from the Baby Boomers. By essentially securing and managing those investments, the banks will basically consolidate all assets under one banner. People are very skeptical when it comes to switching financial institutions and let’s face it is a royal pain to switch banks let alone wealth management firms. With the inheritances in play - younger individuals can just add their own money to already existing large accounts and investment managers will still be managing the same assets fueled with the growth of incomes from younger people.

  1. Chance to bundle services

As with everything, expect that someone is going to try to sell you something. With this move, Scotiabank now has ScotiaMcleod, Tangerine, Jarislowsky, MD and many Caribbean and South American brands under their umbrella. This puts them in a unique position from two fronts:

  1. Their network has greatly expanded to include different regions and accounts. Expect Scotia to milk out all the synergies from their acquisitions while keeping their existing entities entirely independent.

  2. Immense Consolidation of Assets: While many people think of banks mainly from a transactional perspective (making money off transactions, charging for overdraft and others etc), wealth management has been increasing its revenue proportion for years. The catch with wealth management is their fee based accounts which traditionally charge a fee of 1%. This means banks are collecting 1% of the assets (in fees)  annually even if you do not trade in that year.

3. Expect this trend to continue into the future:

Finally, the generational wealth transfer just does not apply to inheritances. Owners of wealth management firms are getting older and desperately want to get out of the game. It may be tempting to stay in the game to make another year of profits but the longer owners wait the lower their acquisition premium will be. This happens because when people are desperate to sell they will take the most reasonable price. In addition, the longer they wait the number of suitable partners declines as they have already acquired other firms. As the old saying goes “With single proprietors, the business lives and dies with the owner”.

Disclaimer: All of the above is my own personal opinion. The figures quoted are for educational purposes only. Please do your research before making any financial decision.

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