Which Bank Is Most Exposed to Wealth Management Reform?

Canadian banks make plenty of money off of wealth management. This could eventually change. How big a risk is this for the banks’ investors?

| More on:
The Motley Fool

For many decades, Canadian investors have gotten a raw deal from their banks. Whether the investor is buying mutual funds, using a financial advisor, or buying individual stocks, the banks have found a way to make outsized profits from these products and services. As a result, most investors have been better off as bank shareholders than bank clients.

To start, bank mutual funds are generally a bad deal for investors. Most of the largest funds just try to track their respective index, and charge a high fee to do so. Financial advisors usually charge a commission for making trades, which creates an incentive to buy and sell stocks too often. And investors who prefer to pick their own stocks have historically been overcharged for making trades.

But that is slowly starting to change. One of the biggest catalysts has been the growth of index funds, which come with much lower fees than their mutual fund counterparts. For example, TD Bank offers index funds (called “e-series”) that charge only 0.33% per year.

But which banks are the most exposed to the changing tides? Which ones make the most outsized profits from the status quo? And should bank investors be worried?

CIBC: The most to lose?

It’s a very imperfect science to figure out which bank would be hurt the most by these changes. But that bank appears to be CIBC (TSX:CM)(NYSE:CM). While the other banks are aggressively pursuing foreign markets, CIBC has been going back to basics, focusing on Canada. Wealth management, which currently comprises just over 10% of net income, has been cited as a key area for growth.

RBC: The most insulated

Canada’s largest bank, Royal Bank (TSX:RY)(NYSE:RY) is actually one of the largest wealth managers in the world. But two thirds of RBC’s wealth management revenue comes from outside of Canada. The bank also has very large capital markets and retail and commercial banking businesses – like CIBC, barely 10% of RBC’s net income comes from wealth management. So it is probably the least exposed out of all the banks.

Foolish bottom line

It is still far too early to highlight wealth management as one of the banks’ biggest risks. There have been many calls for reform before, and after all this time, the status quo reigns supreme. Meanwhile the wealth management businesses at the various banks have been doing just fine – for example, CIBC’s wealth management division increased both its net income and return on equity from 2012 to 2013.

But whenever a business overcharges for its services, investors must always remain wary. Because when a company makes outsized profit margins that it may not deserve, those margins can often go in the wrong direction.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

2 TFSA Stocks to Buy Immediately With Your $7,000 Room

These two stocks provide stability and reliable dividends to grow your Tax-Free Savings Account (TFSA).

Read more »

Group of people network together with connected devices
Tech Stocks

Billionaires Are Selling NVIDIA and Picking Up This TSX Stock

Billionaires are selling NVIDIA (NASDAQ:NVDA), but buying Shopify Inc (TSX:SHOP).

Read more »

analyze data
Dividend Stocks

7.53% Dividend Yield? I’m Buying This Passive-Income Stock Powerhouse in Bulk!

This dividend stock offers a huge opportunity for dividends that will pay you each month you hold them!

Read more »

energy industry
Dividend Stocks

Is Canadian Natural Resources Stock a Good Buy?

Discover why Canadian Natural Resources (TSX:CNQ) stock is a powerhouse of dividends and your portfolio's energy boost for decades to…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

2 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Here are two safe, high-yield Canadian dividend stocks you can buy right now and hold for years.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

This 8.3% Dividend Stock Pays Cash Every Single Month

This high-yielding REIT is worth a look by investors seeking monthly income.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Investing

How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income

These three high-yielding dividend stocks could allow you to earn over $5,000 annually through your TFSA.

Read more »

Value for money
Tech Stocks

3 Cheap TSX Stocks to Buy as the Canadian Market Continues to Rally

Given their discounted stock prices and healthy growth prospects, these three TSX stocks offer excellent buying opportunities for long-term investors.

Read more »