The Investment Industry


The investment industry is composed of a wide variety of firms. The
main players include independent full line brokerage firms, investment bank
subsidiaries of chartered banks, and discount brokers. Independent full line
brokerage firms offer a wide range of services, including underwriting, trading
of stocks, advice and research. In essence, the full service brokerage
subsidiaries of chartered banks offer the same services, however, banks\'
brokerage firms may have a larger pre-established clientele. Finally, the
discount brokers are basic stock brokers that perform trades for clients who do
not want investment advice. Usually, this service is targeted toward the
sophisticated investor who does his/her own research to incur minimal commission
fees.
Banks entered the investment industry in 1987, whereby they took over
full-service brokerages, introduced mutual funds to the banking industry and
became part of discount brokering. From this time on, chartered banks have
expanded their dominance in the industry by acquiring key players in the
industry or branching off into full brokerage services. For example, the
brokerage firms for CIBC, Royal Bank, Toronto Dominion Bank, Bank of Nova Scotia
and Bank of Montreal are Wood Gundy, RBC Dominion, Evergreen, Scotia McLeod and
Nesbitt Burns respectively. In addition, the aforementioned chartered banks have
also branched into the discount brokerage sector.
As of December 1994, the Securities Industry as a whole included 158
firms, directly employs over 24,000 people, has operating revenue of $5.1
Billion and operating profit of $1.2 Billion (Appendix A). Within this industry
the largest firms ranked by revenue are: RBC Dominion Securities ($1 Billion),
Midland Walwyn ($480 million), Burns Fry ($416 million) and Nesbitt Thomson
($335 million) (Appendix B). It is evident that the industry is highly
concentrated in a small number of companies. The top 4 leaders in the industry
accounted for 44% of revenue, while the top 8 was 51%.
Industry information from 1993 displays further segregation, between
retail, institutional and integrated firms. Integrated retail-institutionalized
firms (RBC Dominion Securities, Scotia McLeod, Nesbitt Thomson, Wood Gundy) made
up 66% of the industry\'s revenue, while strictly institutional firms (First
Marathon Securities, Gordon Capital Corp. and Loewer Ondaatje McCutcheon Ltd.)
made up 21% and Retail firms (Green Line Investor Services Inc.), 15% (Appendix
C). The following analysis will outline the investment dealer\'s industry,
specifically the life cycle, critical success factor, strengths, weaknesses,
target markets and profitability.

Life Cycle

The demand for investment financial services is expanding. This becomes
evident by examining the average increase in revenue which has occurred over the
1990-1994, 5 year span. This amounts to a 114% increase in revenue, ($2.4
Billion and $5.13 Billion), (Appendix A). An additional indication of growth in
the investment industry is the fact that the number of firms in the industry has
increased from 119 in 1990 to 158 in 1995, and 163 by the second quarter of 1995
(Appendix A). Furthermore, firms are entering the market because they realize
the increasing need for investment services as well as the potential for profits.

It is obvious that the industry is growing, however the cause for this
growth must also be addressed. Firstly, demographics of the Canadian society
point towards an aging population. This aging society is comprised of active
retired and semi-retired individuals who have knowledge, time and disposable
income for investing purposes.
Moreover, younger generations who fear the elimination of the existing
CPP because of the aging population, are interested in "building a retirement
nest egg." (Fine, p. B21) Secondly, the fact that people want to be more
educated about the investments industry, ties into an additional cause for
growth in the industry. The market is offering more information to those who
want to be part of it. This additional information reduces investors\' fear of
not knowing enough, and if they choose to take advantage of the available
information they can capitalize on it. Also, more information gives people the
perception that they are able to make an increased number of higher quality
investment decisions.
Finally, the entrance of banks into the industry has increased public
interest. First of all, banks carry a great deal of trust which is extremely
important to the average investor. Second, banks are higher profile marketers
so they reach a larger number of people. In addition, the large number of
branches makes the product readily available and easily accessible. Banks also
have a large existing customer base to which they can market products, and
influence investing. Overall, banks have increased the demand for investment
services by creating interest and awareness to people who would otherwise not
give extensive consideration to investments. Critical Success Factors
The investment industry is very volatile in that the upward trend in
today\'s market does not guarantee the same trend tomorrow. Investment