By Tom Bradley

I walked into the office this morning to the news that AIC, the troubled fund company owned by Michael Lee-Chin, has been sold to Manulife. I smiled.

I always smile when I hear that more consolidation has occurred in the wealth management industry. That’s because there are too many players and too much identical product. Mergers help eliminate some of the duplication and they create a little more space for firms like Steadyhand to emerge.

Most people, including the commentators in the media, react differently. It seems that each consolidation lends credibility and urgency to the ‘bigger is better’ view. As the argument goes, it’s getting harder for the small guys to play in a world of giants.

Here’s why I smile rather than shudder:

• Not all investors want to have their assets with the mega-firms (banks, insurers, global conglomerates). Many want other options. And we know from experience that not all the clients of firms that have been taken over go along with the transition – examples being Altamira, Synergy, KBSH, PH&N, Saxon and Mavrix.
• While the acquired firms may intend to bring their unique culture to the bigger institution, it never works out that way. The big firms have a history of doing acquisitions and their formula calls for a complete integration into the mother ship. Wealth management, which is now an important part of these firms, is no exception.
• As for the acquired mutual funds, some are left as they are, some are merged into existing funds and some have the management switched over to one of the buyer’s more successful portfolio managers. As a competitor, it warms my heart to see more funds and assets being put on the plate of the talented ones. It’s another step away from being right-sized.

The conventional view on consolidation overlooks one important fact - when it comes to investing, small is beautiful. Scale is good for lowering costs in the areas of administration, compliance and marketing, but more assets make the job of a fund manager more difficult.

I fully acknowledge that my reaction is self-serving, but it should be noted that I’ve always smiled at this type of news, even when I ran a $50 billion organization.

Some industries go through a life cycle whereby the small fry grow to be medium fry and then get merged into large fry. In the meantime, more small fry pop up to keep the cycle going. This predictable evolution occurs in industries like asset management where smarts are more important than scale and access to capital. Other great examples of this include the oil patch in Alberta and the tech sector.

So while consolidation helps perpetuate the cycle (smile), the most important factors driving it are still (1) smart people creating unique firms and (2) fertile ground to let them grow. A highly-concentrated landscape in Canada is plenty fertile for Steadyhand and other small fry.