Canaccord Financial Inc. , one of Canada's largest independent brokerages, is shuttering half of the Canadian branches of its wealth management business and shifting its focus toward markets that offer more potential for growth and profit.
The company said Monday that it would shake up the business, closing 16 wealth management locations in 14 cities across the country. However, the offices weren't high performers, accounting for just 16 per cent per cent of client assets in the company's Canadian wealth management business. Many of these branches were quite small with only a few people working there. As Canaccord restructures, it expects charges (including severance) to total $11.5-million.
Along with the move to cut locations, Canaccord also trimmed its advisory teams by 35 to 180. These changes come as the company struggles under the pressure of volatile markets and low investor confidence. The Toronto-based firm's most recent quarterly results indicate that the company lost roughly $7.3-million before taxes in its North American and Australian wealth management division.
With the changes announced today, the firm hopes to buoy the business back up to break-even status by the start of its next fiscal year, which begins on April 1.
And getting the business division back to profitability is even more important for firms such as Canaccord, given the focus of the Big Six banks on their own wealth management businesses. The space is attractive to the Big Six because of the low capital requirements necessary to run the groups. "With both net interest margins and regulatory capital pressures mounting in core banking operations, the relatively high margins, low capital requirements and cross-selling potential ensure that both domestic and international wealth businesses will remain a top priority for domestic banks," says Brad Smith, managing director and head of research at Stonecap Securities Inc. "As dominant players in the domestic wealth [space], the Big Six banks have very significant scale advantages and the ability to carry their operations through to the next cycle," he said.
Several of the big banks have made acquisitions in the wealth management space in the past few years to increase that size advantage. One of those deals was done by National Bank Financial Inc. when it acquired Wellington West Holdings Inc. The bank's wealth management profit increased by $3-million to $34-million in the recent third-quarter earnings report in part because of that acquisition.
Generally, third-quarter wealth management profits dragged, though, in large part because of lacklustre market sentiment. "The global macro trends were negative, and that affected investor confidence, which trickles down to the wealth management business," said Tom Lewandowski, a financial services analyst at Edward Jones & Co. But when global economic growth begins to speed up and market confidence returns, Mr. Lewandowski said he's bullish on the business, especially for banks that have already seriously invested in the strategy.
Too much competition could make it even tougher for smaller firms such as Canaccord, and GMP Securities LP's wealth management group Richardson GMP, to squeeze out a profit, though.
That could be part of the reason Canaccord sees opportunity beyond Canada. The company also announced on Monday the acquisition of Eden Financial Ltd., a boutique wealth management firm based in London with $1.3-billion in assets under management.