The past decade has seen sweeping changes in the Canadian financial services industry, largely for the better. In fact, the forces of competition, technology and regulation have fundamentally altered the industry landscape since the turn of the millennium.

There has been major consolidation, particularly on the mutual fund side of the business, and significant shifts have occurred in the competitive balance, including the rise of the banks as fund manufacturers and the rebirth of independent brokerages among the investment dealers. For financial advisors, it would appear that these changes have, on balance, been for the good.

Certainly, from a purely financial perspective, advisors are probably better off now than they were at the start of the past decade. The data collected by Investment Executive researchers in our annual Brokerage Report Card survey show that advisors today are running significantly bigger businesses and are generally happier with many aspects of their firms than they were 10 years ago.

Average assets under management for brokers in IE’s annual survey have risen to $70 million in the latest version (that is, 2009)from $45 million in 1999; that is down from $86.2 million for 2008, and largely due to the effects of the financial crisis. (All dollar figures are unadjusted.)

Moreover, as IE has long documented in the surveys, these much larger asset bases are spread over notably smaller client lists. Back in 1999, the average broker was serving 369 clients; that is down to just 218 households in the 2009 survey. (Along the way, we changed the term in our question to “household” from “client.”) Although these metrics aren’t strictly comparable, there’s no question that the industry has seen a significant increase in productivity as measured by AUM per household over the past decade.

Productivity rose to slightly less than $440,000 in 2009 from less than $236,000 back in 1999. Again, due to the effects of the financial crisis, the 2009 figure was down significantly from 2008, when advisor productivity averaged $566,000.

Also, brokers’ approval ratings of their own firms have increased in many categories over the past 10 years. Technology plays a big part in this optimism, as increasingly powerful computer systems have enabled firms to improve their efficiency and expand their service capabilities. Improved technology has also facilitated the emergence of a multi-market environment in Canada, creating competition in the trading business where little existed before.

That competition has increased the pressure for lower-cost trades, innovative order types and better execution. The more mundane gains from better technology are reflected at the front lines, in notably higher scores from brokers in areas such as their firms’ back-office support and the quality of client account statements. Although these may not be life-altering advances, they nonetheless represent progress for the average broker.

For the industry overall, the returns generated by technology are reflected in fatter margins. According to data from the Investment Industry Association of Canada, the securities industry’s operating profit margin sat at about 22% in 1999. Through the first half of 2009 (the latest period for which the IIAC has published statistics), operating margins are now hovering in the 33% range.

Additionally, productivity measured in revenue per employee has increased to $372,000 in 2009 from $244,000 in 1999. This is not attributable to a lower head count; industry employment is up in the period, to more than 40,000 in 2009 from slightly more than 36,000 in 1999.

Of course, wider margins inevitably attract increased competition. From the retail advisor’s perspective, evidence of this is the emergence of high-end boutique retail shops over the past few years.

Although the bank-owned dealers still boast the largest sales forces, the composition of the industry has evolved notably with the creation of independent alternatives, such as GMP Private Client LP and Richardson Partners Financial Ltd. (which merged in 2009 to form Richardson GMP Ltd.), Wellington West Capital Inc., Blackmont Capital Inc. (whose wealth-management arm was recently sold to Australia’s Macquarie Group) and Raymond James Ltd. Firms that cater to the entrepreneurial spirit, which defined the brokerage industry before the bank-owned dealers began taking over in the late 1980s, also rate highest with brokers in the IE surveys.

But while the banks may have been overtaken a bit in the brokerage industry by the independent upstarts over the past decade — at least, from the point of view of the brokers’ ratings in IE’s surveys — the banks have become much more powerful players on the manufacturing side, as they have come to dominate the asset-management business.

Indeed, some of the biggest changes in the financial services industry over the past 10 years have come in the mutual fund arena. There has been significant consolidation among the fund companies, and the bank-owned firms in particular have increased their share of industry AUM along the way.

The Investment Funds Institute of Canada reports that as of Nov. 30, 2009, total mutual fund AUM were $586.8 billion — up by a good 60% from the same month in 1999 — not including the $57.9 billion held by CI Investments Inc., which, along with a handful of smaller firms, doesn’t report its numbers to IFIC. Counting CI’s AUM puts the industry total at almost $645 billion — meaning industry AUM is up about 74% over the 10-year period.

Yet, the Big Five bank-owned fund companies have grown much faster than the industry overall, almost tripling their collective AUM over the same period, to $256.7 billion in November 2009 from $87.6 billion in November 1999. Indeed, RBC Asset Management Inc., TD Asset Management Inc. and BMO Asset Management have tripled their AUM over the past decade, and both CIBC Asset Management Inc. and Scotia Securities Inc. have more than doubled their totals. As a result, these five firms now collectively represent almost 40% of total Canadian mutual fund AUM, up from less than a quarter back in 1999.

Some of the big independent companies have also thrived over the same period. Of the 20 largest firms in 1999, Dynamic Funds Ltd. and CI Investments boast the highest growth rates between then and 2009 — even faster than the banks. But, at the same time, some of the biggest independents have seen little or no growth in AUM.

For example, back in November 2000, after AIM Funds Management Inc. acquired Trimark Investment Management Inc., the combined company (now Invesco Trimark Ltd. ) was the second-largest in the industry, with slightly less than $34 billion in AUM. Today, it is down slightly, with $29.2 billion in mutual fund AUM, according to the latest IFIC data.

A couple of the other large independents from 1999 are in the same boat, with minimal AUM growth over the past 10 years.

Despite the impressive growth of a couple of large independents and a handful of small firms, the bank-owned fund companies have risen to the top of the mutual fund mountain over the past decade, capitalizing on their distribution advantages to drive sales and on their financial muscle to make acquisitions when the opportunity presents itself.

Growth by acquisition has been one of the primary strategies for both the independents and the bank-owned firms that have made big gains over the past decade. This trend has drastically altered the competitive landscape of the fund industry over that time frame — nine of the 20 largest fund companies from 1999 have since been acquired by a rival.

It’s much the same situation on the fund-dealer side, in which consolidation has been an even more powerful force. Only a handful of the top mutual fund dealer firms from 1999 remain. Most have been bought up, as firms have sought scale to help accommodate rising cost pressures.

Although fund sales have tailed off since their glory days in the mid-1990s, the dealers’ fixed costs have continued to rise, in terms of technology expense and regulation. The direct and indirect costs of regulation seem to rise relentlessly throughout the financial services industry, but the effects are particularly apparent in the fund-dealer business, which was very lightly regulated at the start of the decade.

The Mutual Fund Dealers Association of Canada had been created on paper by 1999, but the organization hadn’t yet started admitting members or applying its rules back then. The MFDA got up and running in the ensuing years, and fund dealers began to feel the impact of the new and growing compliance burden.

Although this development has been good for investors, it has also hastened consolidation within the industry. It has also driven some firms toward the full-service securities business, as they seek to diversify their revenue stream beyond the traditional mutual fund business.

Yet, business has grown for the fund dealers that have hung in there over the past 10 years. Average AUM for fund dealer reps who participated in the IE survey at the start of the past decade was $15.4 million. In 2009, that was up to $20.6 million. (Again, the amount for 2009 is down substantially from the previous year, when average AUM was $23.7 million, because of the financial crisis.)

Average productivity was also up, rising to more than $100,000 in AUM per client in 2009 (albeit less than roughly $130,000 in 2008) from about $80,000 in 1999.

The fund-dealer business may not have enjoyed the same magnitude of growth as the investment-dealer business over the past decade, and advisors on the fund-dealer side of the industry have surely faced a bigger increase in their compliance burden than their counterparts on the brokerage side.

But respondents to the IE dealer survey in 2009 nevertheless gave their firms higher ratings than they did back at the start of the decade in a number of categories.

They may have plenty of grumbles, particularly about the increasing regulatory burden, but it seems the survivors of this period are presiding over bigger, more productive books, and are at least somewhat happier with their firms in the process. IE