Fund industry sales are looking relatively robust heading into the thick of the all-important RRSP season, but the spoils are unlikely to be shared equally because the banks are further tightening their grip on the market.

The latest sales data suggest that 2007 is setting up to be another solid RRSP season. December’s net sales reached $3.2 billion, and long-term sales were $2.4 billion. Overall net sales were up 25% from November.

A report by Toronto-based UBS Securities Canada Inc. shows that December sales were their strongest since 1996, and were more than double the average for the month from 1994 to 2005. It was also the fourth straight time the monthly sales total exceeded its average over the previous 12 years.

The string of strong sales performances has some analysts expecting good things this year.

“Sales during the last three months of 2006 have been the strongest in many years, and we expect the strong sales momentum to continue into the 2007 RRSP season,” says a report by Genuity Capital Markets of Toronto. “Based on the sales momentum into mutual funds particularly over the past few months, we believe the 2007 sales results may reach record highs.”

Record sales would certainly be welcome, but a rising sales tide does not lift all boats. It’s largely the banks that are sailing along, and leaving the others in their wake. In December, the banks collectively accounted for more than 50% of the net sales. In November, their combined share amounted to almost three-quarters of net sales.

Once again, in December, RBC Asset Management Inc. of Toronto led the industry in long-term net sales, followed by its regular running buddy, Toronto-based TD Asset Management Inc. Scotia Securities Inc. of Toronto, the smallest of the Big Five’s fund companies, ranked a surprising third. For all of 2006, RBC and TD ranked first and second in long-term net sales, respectively, with BMO Investments Inc. of Toronto taking third place.

The situation isn’t expected to change very much.

“We believe the dominance of the banks will continue,” says the Genuity report. “The branch distribution channel gives the banks a competitive edge over the independent fund managers. Furthermore, some of [the banks] now have strong fund-performance results.”

Although performance rises and falls, distribution is the competitive advantage that keeps on giving — and it’s a big advantage for the banks. They have literally thousands of captive advisors in their branches, as well as priority access to thousands of others in their more independent full-service brokerage divisions.

“Distribution is to financial services what location is to real estate — it’s critical,” says industry analyst Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “And nobody has distribution like the banks.”

That wasn’t always the case. Although the banks have long had vast branch networks, it’s only in the past decade that they have exploited those locations to sell mutual funds. In the mid- to late 1990s, the independent side of the industry felt little fear of competition from the banks. At the time, the banks’ sales forces weren’t up to snuff, and their funds were nothing to write home about, either.

In fact, many independents saw the banks as easy targets rather than fearsome rivals. After all, the independents were feasting on the banks’ so-called “GIC refugees” to drive their own sales.

Nowadays, the banks are dictating the play. At an industry conference in mid-January, Bill Holland, chief executive of CI Financial Income Fund, called the banks “the single biggest driver of competition in the wealth-management industry” and pointed out that they could be making more money in asset management, but what they really want is market share.

And they are getting it, capturing between two-thirds and three-quarters of the available net sales and leaving the independents to scrap over the remainder.

To date, RBC and TD have been the big winners, but Holland expects all of the big banks to thrive in the fund business over the long run. Indeed, Scotia Securities ranked third in December, BMO took third place for 2006 overall.

Holland adds: “I’d be very surprised if CIBC [Asset Management Inc. ] doesn’t do very well this year.”

The rise of the banks seems inevitable. After all, given the appeal of the asset-management business, it’s no surprise that the banks would covet it. It’s a business that generates stable fee revenue, it can be extremely profitable and it plays to the banks’ primary strength, which is scale. They have the market power to thrive in almost any segment that catches their fancy, although it took them some time to figure out how to exploit it in wealth management.

@page_break@Even in hindsight, it’s hard to imagine that things could have unfolded much differently. There was, however, one moment when, if the independents had been more far-sighted, they had a possible opportunity to thwart the banks’ rise.

In 1999, the Ontario Securities Commission sought to bring in a rule that would have imposed proficiency requirements on reps holding themselves out as financial planners or using other similar titles. But the initiative was ultimately killed by industry lobbying.

It’s hard to say to what extent tougher proficiency standards, or the regulation of titles, could have disrupted or delayed the rise of the banks in the mutual fund industry. But it is conceivable that if the industry had taken its medicine back then, the independents would have been in a better position to preserve their edge over the banks.

Independent industry commentator Glorianne Stromberg says she’s unsure whether the independents could have beaten the banks in the long run, but she believes they “seriously misjudged the determination and capability of the banks to gear up, raise their proficiency levels in respect to financial planning and enhance their asset-management abilities.

“Dropping the ball on proficiency levels was a grave mistake for the independents,” she continues. “I’m not sure that they will ever be able to catch up.”

Instead, it was the banks that got their distribution act together, and they’ve since gobbled up market share. Based on data from Toronto-based Investor Economics Inc. , at the end of 1999, when the proficiency rule was first proposed, RBC’s long-term asset share was 6.2%; it’s now 9.3%. Similarly, over the same period, TD’s long-term share has increased to 6.9% from 2.7%; CIBC’s has grown to 6.3% from 3.7%; and BMO’s to 3.2% (4.2%, if including Guardian Group of Funds Ltd. ) from 2.1%. Only Scotia Securities hasn’t enjoyed significant market share growth.

Some growth has come by acquisition, but the banks have also taken market share away from the rest of the industry by exploiting their distribution potential.

Hallett says he doesn’t believe the independents missed a chance to derail the banks: “It was only a matter of time before the banks really made better use of their branch networks, and the perceived safety of the ‘bricks and mortar,’ by getting better-qualified people in their branches helping clients invest those big chequing account balances.”

Such may be the case, but by conceding their proficiency advantage so easily, the independents are left in a situation in which the banks not only are dominating sales, they are now setting the competitive agenda. For example, RBC recently cut the MERs on its global equity funds by 15 basis points. Although that’s easy for RBC to do, Holland notes, 15 bps for a mid-sized fund manager can be the difference between profitability and poverty.

As a result, for an independent to be successful competing against the banks, Holland says, the independent must either be big and comprehensive or small and nimble. It must have some sort of access to distribution, and it needs greater operational efficiency. IE