They may not be quick or agile, but eventually the Canadian banks tend to get it right. The mutual fund industry has learned this lesson the hard way in the past couple of years, as the banks have taken over — a development that leaves the banks fighting for industry supremacy, and independents wondering how they will survive.

The past year was a relatively strong one for mutual fund sales. Each month, the industry racked up the kind of totals it hadn’t enjoyed for three or four years. The trouble for many firms is they are not sharing the spoils. Invariably, one of the big bank-owned firms — frequently RBC Asset Management Inc. or TD Asset Management Inc. — led the way each month, with much of the rest of the industry fighting over the crumbs.

A few years ago, the idea that the banks would dominate this business would have seemed absurd. Distribution was controlled by independent salespeople who vowed they’d never work for a bank, and the banks’ money managers didn’t have the knockout performances that could overcome their unpopularity among brokers and planners.

Yet, that’s just what has happened, and it seems inevitable the fund industry will become even more dominated by the big banks in the years ahead. At a recent industry conference hosted by RBC Financial Group, CI Financial Inc. CEO Bill Holland predicted that over the next five years the Canadian asset-management business will become sharply divided, with a handful of “bulge bracket” firms sitting atop the business and a smattering of boutiques filling the rest of the space.

Holland foresees a day when seven or eight firms will dominate the business, accounting for the vast majority of assets. The top 10 firms already represent about 70% of industry assets, and their market power is expected to grow.

He thinks each of the Big Five banks could be a strategic purchaser of other asset managers in coming years. The Big Three insurers probably will be there in some form as well, although the case for insurers in the fund business isn’t as clear as for the banks. The banks are logical players because they already have millions of relationships with customers in their core retail banking business. Converting these banking customers into investment clients is a logical and lucrative progression.

The natural fit between retail banking and investments is underpinned by an aging population that will accumulate greater wealth and will want guidance managing those resources in retirement.

But, Holland notes, while these basic forces should provide reasonable baseline growth in the years ahead, the more compelling story is the looming battle among industry players for those assets.

The call for increased consolidation has been resounding throughout the fund industry for some time, but it has yet to materialize. At the same conference, Bill Hatanaka, RBC’s executive vice president, wealth management, said strong markets have been the chief impediment to consolidation; mid-market firms may be having a difficult time selling their funds, but their total assets are still rising because of the market effect, so pressure to sell out isn’t overwhelming.

Moreover, management at some firms like to be in the business, Holland notes, despite the fact that it’s not going well for them. When markets turn, these firms may no longer be able to ignore their fundamental weaknesses because the cost of running a fund company is heading higher, too.

Size matters

As costs escalate, advantages of scale are magnified. Being big not only makes it easier to maintain a healthy bottom line but big firms can outplay the competition in the areas that drive sales — costs, branding and distribution.

Big firms can use their size to gain efficiencies, which can in turn be passed on to investors as lower fees and expenses. There are signs that this is becoming increasingly important in the Canadian fund industry. CI has been one of the leaders in this area. In fact, it made the prospect of lower fees for unitholders one of its chief weapons in the takeover battle for Clarington Corp. — a battle it nonetheless lost to a richer bid.

Competitive responses to CI’s efforts have been scarce. In early January, however, Fidelity Investments Canada Ltd. took an additional step toward lower unitholder costs by announcing a low-load sales charge option on its funds. With the traditional front-end load, deferred sales charge and the original low-load option Fidelity introduced last January, this gives the firm four sales alternatives and the promise of lower fees.

@page_break@Yet there are still fund companies that are fielding expensive funds. One reason may be that it is hard to abandon the conviction that price doesn’t matter much as long as performance is good. Another is that some industry players aren’t run well. Indeed, Holland says, many money managers are terrible corporate managers.

This weakness wasn’t evident in the late 1990s, when the industry was benefiting from a huge demographic shift away from traditional savings products into investments. But as that shift ebbed, competition for retail investment dollars heated up and shrewd management has become relevant.

The banks weren’t great competitors then, but they’ve become better in the past five years or so. They have built impressive branch-based sales forces and ramped up their wholesaling efforts — seizing the distribution advantage from many independents.

The banks now have the upper hand in distribution, and it is unlikely they’ll relinquish it: distribution is expensive to buy or build from scratch; it tends to not make money in its own right, so it’s not a business many firms can afford to bolt on; and distribution has already largely been consolidated.

Hatanaka says future success will depend on providing clients with a full slate of products, services and delivery channels (from self-serve to full-service, private banking, insurance and trust services), and delivering a superior client experience.

The banks may have won the battle for scope and scale. It remains to be seen if they can deliver an experience that matches the evolving needs of their clients as they move from wealth accumulation to preservation and risk management. IE