Two investment fund management firms that previously appeared on Business in Vancouver’s Top 100 Money Sources list were conspicuously absent this year.
Global Securities Corp. and Wolverton Securities were acquired by PI Financial Corp. last March, consistent with ongoing finance industry consolidation.
Various factors are driving that trend.
While credit unions and other lenders are benefiting from consolidation, B.C. investment brokers are merging to remain afloat.
Kai Li, professor of finance at the University of British Columbia’s Sauder School of Business, said increased competition is forcing investment firms to merge. Emerging financial technology is making worldwide investments more accessible to consumers. That, in turn, is reducing the need for investment brokers or agents.
Limited knowledge and inexperience are also less of a barrier now for would-be investors, many of whom are choosing to passively invest by putting money into exchange-traded and index funds rather than actively investing in mutual funds and individual stocks. Many financial advisers are also being replaced by smartphone apps and financial technologies that help develop investor portfolios.
“Passive investing is gaining tremendous momentum when compared to active investing,” said Li. “This cuts investment firms’ profit margins, so in order to survive they try to take advantage of the economies of scale [by merging].”
While consolidation reduces competition, Kai said the ability of individuals to invest directly online means investment choices for consumers are not being reduced, which is more likely to negatively affect the industry.
“The Internet gives you access to any investment around the world, so why would you need people located in Vancouver or Canada?” asked Kai. “It’s bleak for that industry.”
Credit unions and other lenders are merging for reasons different from those of their investment-sector counterparts.
According to Andrey Pavlov, professor of finance at Simon Fraser University’s Beedie School of Business, recent regulatory changes to lender capital requirements are contributing to the consolidation trend.
Pavlov said the resulting non-competitive marketplace means lenders are issuing similar mortgages and charging similar fees. That reduction in choice, he said, will likely worsen as credit unions and other lending institutions continue to merge.
“We really only have a handful of lenders that are engaged in consumer credit and mortgage lending,” Pavlov said. “As a result, the Canadian mortgage market is very unfriendly toward the consumer. The mortgages we get in Canada are all rigged in favour of the lender and not at all in favour of the consumer.”
But consumer consolidation concerns don’t extend to investors and brokerage institutions. Pavlov said investment and brokerages fees have been dropping while investment choice has been expanding.
While investment firms are being forced to consolidate because of easy access to different investment choices, credit unions and lenders are able to merge and grow because of limited consumer choice.
“If I want a mortgage in Canada, I cannot borrow from Bank of America [NYSE:BAC] or Citibank [NYSE:C],” said Pavlov. “I can invest with them – that’s not an issue – but I cannot borrow from them.” •
