Boom amid the gloom

The Government of Ontario’s latest provincial budget, handed down on April 11, details a five-point plan for bolstering capital markets. That plan focuses largely on reducing existing regulation and constraining future rule-making as a way of keeping the industry’s costs under control and fostering growth.

The Ontario Securities Commission (OSC) is embracing that mandate. In late 2018, the OSC created a Burden Reduction Task Force, and earlier this year the regulator launched consultations about ways to cut red tape. The OSC already held one industry roundtable on the subject in March, and two more are slated for May.

Following the release of the provincial budget, Maureen Jensen, chairwoman and CEO of the OSC, welcomed the government’s plan to boost capital markets.

“We are excited by these opportunities to modernize regulation and make further progress on our work to enhance the experience of those who invest and do business in Ontario,” she says. “In particular, we welcome our government’s support for more rigour and transparency in our rule-making process and service standards – both areas [in which] we continue to engage with stakeholders, as part of our wide-ranging consultation on ways to reduce regulatory burden and improve the investor experience.”

Yet, as policy-makers scramble for ways to cut costs in the industry, there’s plenty of evidence that the industry is doing just fine.

The latest edition of Investment Executive‘s annual Brokerage Report Card survey found that retail brokers are enjoying strong growth in assets under management, households and compensation. (See Brokerage Report Card 2019 stories on pages 15-30.) These positive results are echoed in the latest industry performance data, which reveal that not only is the industry producing record revenue and profits, but the retail side is leading the way.

Total securities industry revenue came in at $22.9 billion for 2018, up from $21.2 billion in the previous year, according to data from the Investment Industry Association of Canada. (All dollar figures have been rounded.)Although industry operating expenses also rose at a healthy pace last year, rising by 7.0% year-over-year, revenue growth (8.3%) outpaced the increase in expenses, thus enabling the industry to generate record profit.

Overall industry operating profit for 2018 came in at $7.3 billion, up by 13.0% from 2017. And net profit climbed to slightly less than $4.2 billion from $3.7 billion the previous year – a 12.3% increase.

Thanks to these latest double-digit growth rates, net profits now are more than double what they were just a couple of years ago. In 2015, industry net profit was $2.1 billion.

Against the backdrop of record revenue and profit, industry employment also increased last year, rising to 42,296 from less than 41,000 the year before. So, even though there was consolidation among firms (the number of firms declined to 161 from 166 in 2017), the industry’s head count is rising – by 3.5% year-over-year.

Moreover, this growth in industry employment is outpaced by the rise in revenue – meaning that productivity, as measured by annual revenue per employee, also rose. Overall, the data show that revenue per employee increased by 5.6% year-over-year, rising to $547,000 in 2018 from $518,000 in 2017.

The good times are enjoyed throughout the industry as well. And this is not a case of strong results for the large, bank-owned dealers masking the struggles of boutique firms. In 2018, revenue and profit rose across the board. The large integrated dealers and retail and institutional boutiques alike saw their top and bottom lines improve.

In fact, the biggest winner of the past year may be the retail brokerage channel, which saw its combined revenue jump to $4.2 billion last year from $3.5 billion in 2017 – a 19% increase.

The primary driver of this overall revenue increase in 2018 is retail firms’ fee-based revenue, which rose by almost 20% year-over-year to $1.7 billion in 2018 from $1.4 billion in 2017. Fees edged out commissions as the biggest revenue source for retail firms in 2017, and this advantage grew even more in 2018. At the same time, the retail channel’s net interest revenue also is surging, jumping to $320 million in 2018 from $201 million in 2017.

Within the retail sector, both the small, introducing firms and the larger, self-clearing dealers saw their revenue grow. Revenue for the retail introducers jumped by 28.3% year-over-year in 2018, outpacing the self-clearing dealers, which saw their revenue climb by 12.2% from the previous year.

While the retail channel’s revenue rose, its profit performance is even more impressive. Total operating profit for retail firms rose to $634 million in 2018 from $395 million in 2017 – a 60.5% jump. Here too, the smaller firms lead the way in growth.

Introducing firms saw their combined profit almost triple to $200 million last year from $68 million in 2017. The self-clearing dealers’ combined profit also jumped, to $435 million in 2018 from $327 million in 2017 – a 33.0% increase.

What’s also notable is that the retail firms’ standout performance is far outpacing that of the securities industry’s big integrated dealers.

The big firms enjoyed revenue and profit growth in 2018, with operating revenue rising by 7.2% and operating profits climbing by 10.8% year-over-year. But the rate of growth was much lower than that of the retail firms.

The picture is different for institutional firms, which are seeing notably softer revenue growth than the retail and integrated dealers. In 2018, revenue for the institutional firms rose by just 3%, but operating profit jumped by 19.1% as these firms cut operating expenses by 3.7%.

These trends inevitably are tied to the health of the markets; the good times won’t last forever. But making a case that regulation is stifling growth in the securities industry is difficult right now.