Pessimists on the independent side of the fund industry have long worried that the banks were coming to eat their lunch.
Optimists laughed at the prospect that the bureaucratic banks could ever figure out a relationship-driven business. Well, the worriers were right. Overall fund industry growth has slowed — and the banks have come to dominate.

In the industry’s glory days, the banks’ fund offerings were considered second-rate. Most had dull, underperforming product lineups and their sales efforts largely involved an ad blitz in RRSP season. In recent years, however, it’s all been going the banks’ way. Investor appetites have turned in the banks’ favour, and they have exploited their chief advantage — scale — to improve their product lineups and enhance sales initiatives.

The results are dramatic. Data from Toronto-based Investor Economics Inc.
show that in 2000 the banks collectively accounted for 21% of fund flows in the RRSP season (three months ended March 31) — more or less in line with their 22.5% share of industry assets. This year, Royal Bank of Canada’s RBC Asset Management accounted for 21% of RRSP season net flows all by itself. In the first quarter, RBC generated more than $2 billion in net flows, despite the fact that it boasts only slightly more than 9% of industry assets.

TD Asset Management Inc. represented
13.3% of RRSP season net flows, almost double its 7.5% market share by assets.
Bank of Montreal’s BMO Investments Inc.
and Bank of Nova Scotia’s Scotia Securities
Inc. also enjoyed relative net flows running at more than double the industry average.
CIBC was the only laggard among the five
banks.

The banks’ winning streak seems to come down to a combination of luck and effort. Industry analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc., says banks became more successful sales machines once they started devoting more attention and resources to mutual funds. “It seems the banks began beefing up their resources on all fronts when it became clear that they were losing market share to the independents,” he says.

A few banks beefed up their money-management operations, Hallett notes. For example, CIBC bought full control of TAL Global Asset Management Inc. in 2001 (it had an ownership stake in the firm dating back to1994). Also in 2001, BMO bought Guardian Group of Funds Ltd.

As well as buying assets, the banks devoted more effort to building them. “They also became more competitive from a product-development standpoint, finally introducing clone funds and corporate-class funds, for instance,” Hallett adds.

The efforts to spruce up the product shelf came at an opportune time for the banks.
After the stock market bubble burst in 2000-01, investors in Canada became obsessed with income, and they piled into funds that could deliver it, almost to the exclusion of everything else. Equity income and bond funds have been the dominant sales categories by far for the past few years — a shift that plays to the banks’ strengths.

For example, Investor Economics’ data
show that equity dividend funds were far and away the best-selling category in the four months ended April 30, 2005, with $5.9 billion in net flows — well ahead of the second-place balanced funds that had net flows of $3.2 billion, and bond funds at $3.15 billion. The banks are dominating sales in both equity dividend and bond groups, with the independents leading only in the balanced category.

All by itself, RBC Monthly Income Fund accounted for $1.2 billion of the equity dividend category’s total sales for the period.
Indeed, the five top-selling funds in the category as of April 30 were bank funds. The four highest-selling bond funds were bank offerings, too.

Apart from being in the right place at the right time for investors, the banks are also proving able to sustain their sales beyond the traditional RRSP season. Sales are in some sense supercharged, as the bulk of the dividends they generate are often plowed back into the funds, providing a built-in source of ongoing asset growth.

With heavy demand for such funds, the
banks have been able to improve their distribution as well. Traditionally, bank funds were really only sold in the bank branches and by their captive distribution arms, but they have stepped up their external wholesaling efforts, ensuring that their funds are gaining greater traction in the traditional brokerage channels.

@page_break@For example, in a conference call to discuss its results for the second quarter ended April 30, Bill Hatanaka, TD Bank Financial Group’s executive vice president of wealth management, said 1,500 advisors of one sort or another sold their first-ever TD fund in the past six months. “I think there’s a significant growth opportunity in the external broker-dealer channel,” he says, noting that the channel is “just starting now to pick up on the fact that the TD mutual fund offering is very strong.”

Although good timing and better external wholesaling are certainly key, the banks are simply doing a better job with their internal distribution. Hallett notes that the banks all have bolstered the advisor resources in their branches. “Each firm took its own route in this regard, but they began attracting some good but less entrepreneurial advisors from the ‘independent’ side of the business, while also trying to increase the credentials of existing personnel,” he says.

Bank branches can be an attractive place for the right type of advisor, Hallett adds. “[There are no more cold calls nor prospecting, per se,” he says. “Many branch advisors are given a block of business that they simply must maintain and grow; not new clients, but new business from the existing base, with people that already have a relationship with the bank. It’s the kind of situation that is attractive to advisors that may well be very competent planners but not great at finding new clients.”

In some sense, the banks have enjoyed a perfect storm in their fund-management businesses: demand swung their way at a time when they were poised to capitalize on it with both improved product offerings and better distribution. Still, they have debunked one myth — proving that they can sustain their sales outside of RRSP season, given decent investor interest.

The real test will come when demand swings away. When interest wanes, will good planners with weak prospecting skills be able to retain and grow their businesses? Will the banks be able to deliver product innovations to keep the attention of the independent distributors?

It remains to be seen, but only the banks’ most optimistic rivals would dare assume they’ll fail. IE