A U.S. and a Canadian flag flutter at the Canada-United States border crossing at the Thousand Islands Bridge in Lansdowne, Ont. on Sept. 28, 2020.LARS HAGBERG/Reuters
Andrew Auerbach and Jean Blacklock are contributing columnists for The Globe and Mail. They are co-founders of Delisle Advisory Group, an independent wealth-management firm serving high-net-worth families.
Much has been written about Canada’s poor productivity. There is no question that the data show us losing ground, with the Bank of Canada calling it a national emergency. An important part of the solution rests with more entrepreneurs creating businesses across our economy. We have first-hand experience setting up a wealth-management firm in Canada and the contrasts that exist to the U.S.
The Ontario Securities Commission has a robust process for registration of wealth-management firms in the province and its professionals are thorough. Given the fiduciary nature of such firms managing the accumulated wealth of clients, a careful approach is important. There are stark differences though in launching a firm in Canada compared with the United States, starting with processing times.
The processing-time objective is 120 business days with the Ontario Securities Commission compared to 45 calendar days in the U.S. with the Securities and Exchange Commission (SEC). This means that registration of an investment-counselling firm in Canada’s most populous province takes four times as long as an independent firm in the U.S.
Our environment in Canada is far more complex with the Canadian Investment Regulatory Organization, a self-regulatory organization, and provincial securities commissions. A more streamlined approach would create much more efficiency.
The U.S. has a centralized regulatory framework for securities and investment management through the SEC, which oversees all aspects of securities markets, including mutual funds, investment advisers and brokers. Investment-management firms in Canada must navigate the regulatory requirements of multiple jurisdictions, whereas in the U.S., they deal primarily with the SEC.
Why does this matter? In the United States, competition within industries is a key reason for their success. One factor contributing to our productivity emergency in Canada rests in the market dominance of a few players in major sectors of our economy.
Canadian banks control access to most of the financial wealth in the country, with the banks controlling 75 per cent of the $1.8-trillion held by clients in the full-service brokerage business, the largest wealth-management channel. The entire financial wealth in Canada is estimated at $6.5-trillion of which the Big Six hold 63 per cent.
With that sort of dominance in market share, there is not the competitive incentive for the banks to offer innovations in product choice that you would see with more competitors in our market. In addition, there are inherent potential conflicts of interest within a bank offering multiple services to the client beyond investment management, and creating incentives for investment professionals to offer their clients more services across the bank.
This contrasts with the fiduciary model of an investment-counselling firm. The growth of independent firms matters. Competition benefits consumers and ultimately increases our country’s productivity. Competition gives consumers more choice and lower fees and ultimately forces innovation amongst competitors.
The independent wealth-management arm in the U.S. represents more than 17,000 firms. This compares with fewer than 400 wealth-management firms in Canada. The complexity of launching an independent firm in Canada is a significant deterrent for qualified investment professionals to do so. The investment counselling industry is shrinking not growing with the recent acquisition by Royal Bank of Canada of Gluskin Sheff, formerly one of the largest investment-counselling firms in Canada.
In the U.S., the independent wealth-management channel represents the fastest-growing segment of that country’s wealth market. It has resulted in numerous other industries benefiting from the growth: Hundreds of technology, custodial and operational providers that would not exist without the 17,000 independent wealth-management firms. These firms operate with a fiduciary standard that puts clients’ interests first. This client-focused approach and the elimination of conflicts of interest have resulted in the massive growth. The same is possible in Canada.
Canadian small business is a key engine of growth, and we must look for ways to encourage small business creation to address productivity challenges in all sectors of our economy. The federal government’s statistics indicate small-business owners employ 67.7 per cent of the total private labour force, representing 8.2 million individuals. Our economy depends on a vibrant entrepreneurial environment.
Competition promotes efficiency, growth and ultimately better prices. With market concentration, the opposite happens. Canada is a remarkable country with incredible potential. It can become a global leader in the coming years with its demographic changes, a highly diverse and skilled work force, an abundance of resources, and a stable and safe democracy. But we need to have more competition by supporting and encouraging entrepreneurs in every industry.