May 25, 2020 | Fitch: Customers Leaving Equity Funds Means Lower Revenue for Financial Sector

With the Canadian TSX today virtually unchanged from its April 2008 peak, even the most steadfast buy and hold investors have reaped zero capital gains over more than 12 years of risk and just 1.7% annually since the prior cycle peak in July 2000.  Those who bought GICs and government bonds over these same periods earned significantly more with a fraction of the volatility.

As the current bear market continues its mean reversion course over the next several months, equity underperformance will get worse, and more of the present holders will exit with losses. This leads credit-rating agency Fitch to warn of a revenue hit unfolding in the financial sector.  See Canadian Bank Wealth Management Pressured:

“…Fitch expects elevated market volatility, leading to a sustained lower level of investor confidence, lower AUM (assets under management) and AUA (assets under advisement) levels and thus depressed mutual fund revenues over the near to medium term. Revenues could also be hurt if investors shift to more defensive mutual funds, such as pure fixed-income funds, as these funds have low expense ratios given their low returns.”

And therein lies everything one needs to understand about the investment management and advisory business:  the dominant business models is designed to collect the most fees when customers hold the riskiest assets (debt and shares of corporations).  Keeping their customers holding the most risk is therefore the financial industry’s perpetual bias even when doing so is detrimental to the needs, goals and best interests of said customers.

As more people cash out with losses, wealth management and capital markets revenues will be pressured for the remainder of 2020, Fitch has warned.  This is leading an even greater industry focus on high fee wealth management products and services such as estate and insurance planning.

Customers should be very wary.

Danielle Park May 25th, 2020

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