Canadian Securities Industry PDF

The Canadian Securities Industry 1 CHAPTER OVERVIEW In this chapter, we describe the interrelationships between the various participants in the Canadian securities industry....

The Canadian Securities Industry 1 CHAPTER OVERVIEW In this chapter, we describe the interrelationships between the various participants in the Canadian securities industry. In particular, we discuss the important role that investment dealers and other financial intermediaries play in channelling funds between lenders and borrowers. LEARNING OBJECTIVES CONTENT AREAS 1 | Describe the relationships between the Overview of the Canadian Securities Industry major participants in the Canadian securities industry. 2 | Distinguish among the three categories of The Investment Dealer’s Role as a Financial investment dealers including how they are Intermediary organized. 3 | Explain the difference between principal and agency transactions. 4 | Distinguish among the roles of the various Financial Intermediaries Other than financial institutions. Investment Dealer 5 | Discuss the trends affecting the financial Financial Market Trends services industry in Canada and globally. © CANADIAN SECURITIES INSTITUTE (2017) 1 2 CANADIAN SECURITIES COURSE | VOLUME 1 KEY TERMS Key terms are defined in the Glossary and appear in bold text in the chapter. agent mutual fund broker open-end fund Canadian Investor Protection Fund pension fund CDS Clearing and Depository Services Inc. primary market clearing primary market distribution closed-end fund primary offering consumer finance company principal discount broker retail firm financial intermediary robo-advisor fintech sales finance company firewall savings bank initial public offering schedule I bank institutional firm schedule II bank integrated firm schedule III bank investment dealer self-directed broker investment fund self-regulatory organization Investment Industry Association of Canada secondary market Investment Industry Regulatory Organization settlement of Canada underwriting market maker money market © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 3 INTRODUCTION Consider the following scenarios: A couple needs to borrow money to buy a home. An entrepreneur needs to raise funds to develop a new product. A mother wants to set up a regular program to save for her children’s education. Both the couple and the entrepreneur, as borrowers, are users of capital, whereas the mother, as an investor, is a supplier of capital. What they all have in common is the need for a financial intermediary to help them meet their goals. A financial intermediary is an institution such as a bank that borrows money from suppliers of capital and lends it to users of capital. In other words, investors lend funds to the intermediary, and the intermediary, in turn, lends those funds to borrowers in the form of loans, mortgages, and other products. An intermediary can also play a more direct role. The intermediary can raise capital by bringing a new issue of securities to the financial markets. For example, a company wishing to expand its business might generate the necessary investment capital by issuing securities to the public in the form of stocks. An investment dealer helps the company issue the stocks and sell them to investors. The investors who buy the stocks transfer their money to the company through the intermediary. In return, they receive the stocks, which represent a share of ownership of the company. The company can use the proceeds from the stock transaction and reinvest them in the firm, which spurs further economic development. In addition, the intermediary earns a profit on the transaction. If the firm does well following the expansion and the price of its stock rises in value, investors will be able to sell them in the marketplace to earn a profit. By these means, financial intermediaries help to establish efficient methods of channelling funds between lenders and borrowers. DIVE DEEPER To fully understand the concepts presented in this textbook, you should stay informed about the financial markets and the industry in general. The lessons will be easier to grasp if you relate them to the activities that unfold each day in the financial markets. Countless sources of information about the financial markets are readily available online, as well as in newspapers, books, and magazines. Ultimately, by staying informed, you will more easily reach your goal of becoming a competent and trusted participant in the securities industry. OVERVIEW OF THE CANADIAN SECURITIES INDUSTRY 1 | Describe the relationships between the major participants in the Canadian securities industry. Canada has one of the most sophisticated and efficient capital markets in the world. Market activity is measured by the variety and size of new issues that are brought to the market, as well as the depth and liquidity of trading of those issues. Canada’s securities industry is highly competitive, and it is becoming more competitive each year. Market participants must have extensive, specialized, and up-to-date knowledge about securities issuers and investors in a securities market that is constantly changing. An entrepreneurial spirit of innovation and calculated risk-taking are among its hallmarks. Change and volatility are frequently the norm. © CANADIAN SECURITIES INSTITUTE (2017) 1 4 CANADIAN SECURITIES COURSE | VOLUME 1 The Canadian securities industry is mainly regulated by the provinces. They have the power to create and enforce their own laws and regulations through securities commissions (called securities administrators in some provinces). Securities commissions delegate some of their powers to self-regulatory organizations (SRO) such as the Investment Industry Regulatory Organization of Canada (IIROC). The SROs establish and enforce industry regulations that protect investors and maintain fair, equitable, and ethical practices. In that capacity, SROs are responsible for setting the rules that govern many aspects of investment dealers’ operations, including sales, finance, and trading. The major participants in the industry and their interrelationships are illustrated in Figure 1.1. Figure 1.1 | Structure of the Canadian Securities Industry Suppliers of Capital Investment Users of Capital (Investors) Dealers (Borrowers) Self-Regulatory Organizations Clearing & Markets Investment Industry Regulatory Settlement Organization of Canada Mutual Funds Dealers Association Legend: Industry Players Canadian Securities Canadian Investor Provincial Industry Support Institute Protection Fund Regulator Money Flow Industry Educator Industry Insurance Fund Securities Commission Information Flow The various participants interact with each other as follows: Suppliers and users of capital trade financial instruments through financial markets such as stock exchanges and money markets. Investment dealers (also called brokers) act as intermediaries by matching investors with the users of capital. Each side of a transaction has its own dealer who matches the trades through the markets. Trades and other transactions are cleared and settled through organizations such as CDS Clearing and Depository Services Inc. and banks. Clearing is the process of confirming and matching security trade details; settlement is the irrevocable moment when cash and securities are exchanged. The SROs set and enforce rules that govern market activity and monitor the markets to ensure fairness and transparency. The Canadian Investor Protection Fund and similar organizations provide insurance against dealer insolvency. Provincial regulators oversee the markets and the SROs. The Canadian Securities Institute and similar organizations provide education for industry participants. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 5 DID YOU KNOW? Industry Statistics According to recent statistics from the Investment Industry Association of Canada (IIAC), there are 163 IIROC firms in the securities industry. Together, these firms employ more than 39,000 people. THE CANADIAN SECURITIES INDUSTRY How well do you know the structure of the Canadian securities industry and the interrelationships between its major participants? Complete the online learning activity to assess your knowledge. Note: To access the online components of your course, login to your Student Profile at www.csi.ca and, once logged in, click on the ‘Access Online Courses’ button. THE INVESTMENT DEALER’S ROLE AS A FINANCIAL INTERMEDIARY 2 | Distinguish among the three categories of investment dealers including how they are organized. 3 | Explain the difference between principal and agency transactions. The term financial intermediary describes any organization that facilitates the trading or movement of financial instruments that transfer capital between suppliers and users of capital. Intermediaries are a key component of the financial system. They include investment dealers, banks, credit unions, trust companies, and insurance companies. Let’s look at the role of the investment dealer as a financial intermediary. Investment dealers act on their clients’ behalf as agents in the transfer of financial instruments between different investors. They sometimes also act as principals, rather than agents. In both cases, they play a significant role in the securities industry’s two main functions: 1. They help to transfer capital from suppliers to users through the underwriting and distribution of new securities. This activity takes place in the primary market in the form of a primary market distribution (or primary offering). When a private company goes public and issues stocks in the primary market for the very first time, the sale is known as an initial public offering (IPO). 2. They maintain secondary markets in which previously issued or outstanding securities can be traded. For example, buying and selling stocks through the Toronto Stock Exchange. TYPES OF INVESTMENT DEALERS The following three categories of investment dealers make up the Canadian securities industry: Retail firms include full-service investment dealers and self-directed brokers (also known as discount brokers). Full-service retail firms offer a wide variety of products and services for the retail investor. They also provide various levels of advice, depending on the financial and wealth management concerns of their investor clients. Self-directed brokers, on the other hand, are considered the do-it-yourself approach to investing. They execute trades for clients at reduced rates, but they do not provide investment advice. Institutional firms are investment dealers that serve exclusively institutional clients, organizations that trade large volumes of securities. Institutional clients include pension funds and mutual funds, and may be domestic or foreign institutional firms. In Canada, foreign firms account for about one-third of all institutional clients. Foreign firms include affiliates of many of the major U.S. and European securities dealers. © CANADIAN SECURITIES INSTITUTE (2017) 1 6 CANADIAN SECURITIES COURSE | VOLUME 1 Integrated firms offer products and services across the industry and participate fully in both the retail and institutional markets. Most integrated firms underwrite all types of federal, provincial, and municipal debt, as well as corporate debt and equity issues. They are active in secondary markets, including the money market, as well as on all Canadian stock exchanges and some foreign exchanges. Many smaller retail or institutional investment dealers, known as investment boutiques, specialize in particular market segments. For example, an investment boutique might specialize in stock trading, bond trading, or trading strictly in unlisted stocks. ORGANIZATION WITHIN FIRMS The operational structure of investment dealers varies widely in the industry. A typical configuration divides the firm into different departments, with each department focusing on a specific task. A larger, integrated firm, for example, might be organized into front, middle, and back offices, with senior management overseeing all departments. The roles of the various departments are described below. SENIOR MANAGEMENT Senior management usually includes a chairperson, a president, an executive vice-president, directors, and departmental vice-presidents, some of whom are also directors. Some firms may have directors from outside the securities industry. Most senior officers work at head office, but some may be in charge of regional branch offices in Canada or abroad. FRONT, MIDDLE, AND BACK OFFICES The three-level organizational structure of most investment dealers allows them to manage client portfolios effectively and process trades efficiently, in compliance with regulatory requirements. The functions and duties of each department are described in Table 1.1. Table 1.1 | Departmental Functions at an Investment Dealer Role Functions Front Office Performs all staff functions pertaining directly Portfolio management to portfolio management activities Trading Sales Marketing Middle Office Performs functions critical to the efficient Compliance operation of the firm Accounting Audits Legal Back Office Settles the firm’s security transactions Trade settlement The success of an investment dealer rests largely on profits generated by its sales department, which is usually the largest unit in the firm’s front office. In an integrated firm, the sales department is typically separated into institutional and retail sales. The retail sales force serves individual investors and smaller business accounts. It usually comprises the largest single group of a firm’s employees. Retail investment advisors normally perform a wide range of activities to meet the complete spectrum of the investors’ types and needs. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 7 THE PRINCIPAL AND AGENCY FUNCTIONS OF AN INVESTMENT DEALER Investment dealers facilitate the trading of securities and the transfer of capital between suppliers and users. They sometimes act as principals; at other times, they act as agents for their clients. PRINCIPAL TRANSACTIONS When they act as principals, investment dealers may own the securities as part of their inventory, at some stage of the buying and selling transaction with investors. The difference between the buying price and the selling price of the securities is their gross profit or loss. Another principal transaction is underwriting. In the securities business, underwriting refers to purchasing from a government body or from a company a new issue of securities, on a given date at a specified price. When investment dealers act as principals by underwriting, they use their own capital to buy an issue to then sell it at a profit in the primary market. After a primary distribution is completed, investment dealers also act as principals in secondary markets by maintaining an inventory of already issued, outstanding securities. In these transactions, the dealers buy securities in the open market, hold them in inventory for varying periods of time, and subsequently sell them. AGENCY TRANSACTIONS When investment dealers act as agents on behalf of buyers or sellers, they do not own title to the securities that they deal with, at any time during the transactions. Their profit is the agent’s commission they charge for each transaction. In these transactions, the principals are the clients who buy and sell securities, and who own the securities. The agent acting for the seller and the agent acting for the buyer both respectively charge their clients a commission for executing the trade. The principal and agent roles in securities transactions are illustrated in Figure 1.2. Figure 1.2 | Principal Versus Agent Transactions Principal Agent Seller Buyer Seller Buyer DID YOU KNOW? An agent acting on behalf of a client is often called a broker, and the broker’s role is generally thought of as that of an agent. However, the term broker is commonly used to describe an investment dealer acting in any capacity. Generally, for most secondary trading of debt securities, the investment dealer acts as principal, although occasionally some agency trades take place. With new money market issues, for example, a dealer may either sell the securities as an agent or take them into inventory as principal for a later resale. © CANADIAN SECURITIES INSTITUTE (2017) 1 8 CANADIAN SECURITIES COURSE | VOLUME 1 SERVICES PROVIDED BY INVESTMENT DEALERS By participating in the secondary market and maintaining an inventory of outstanding securities, investment dealers provide several useful services: They provide informed advice about the terms and features for new issues in the primary market, based on their knowledge of current conditions in the secondary markets. They add liquidity to the market with relative ease by making transactions from their inventory, rather than waiting for simultaneous matching buy-sell orders from other investors. They sometimes act as market makers and carry out market making duties by taking positions in assigned listed stocks to enhance market liquidity and smooth out undue price distortions. They sometimes buy listed stocks as principals, thus accumulating large blocks of shares, becoming more competitive in serving their larger institutional clients. The liquidity they add to the secondary market enhances the primary market by assuring that buyers of new securities will be able to sell their holdings at reasonable prices. Investment dealers also trade from their own account to make a profit. THE TWO ROLES OF AN INVESTMENT DEALER What is the difference between an investment dealer’s role as a principal and its role as an agent? Complete the online learning activity to assess your knowledge. THE CLEARING SYSTEM During a trading day, exchange members act as both buyers and sellers of many listed stocks. Rather than each member making a separate settlement with another member on each trade during the course of a trading day, a designated central clearing system handles the daily settlement process between members. In Canada, securities are cleared through CDS Clearing and Depository Services. Although CDS is not considered a financial intermediary, it is a valued partner to dealers that operate in the securities market, providing reliable clearing services. CDS operates CDSX, the facility for the clearing and settlement of trades in equity and debt securities in Canada and for various cross-border transactions. Marketplaces such as the Toronto Stock Exchange (TSX), the TSX Venture Exchange, and alternative trading systems report trades to CDSX. Over-the-counter trades are also reported to CDS by participants in the system. Participants with access to the clearing and settlement system primarily include banks, investment dealers, and trust companies. The central clearing system uses a process called netting to establish and confirm a credit or debit position balance, in the form of cash or security, for each dealer member. The netting process compiles each firm’s clearing settlement sheets and informs each member of the securities or funds it must deliver to balance its account. In this way, the number of securities and the amount of cash that must change hands among the various members each day is substantially reduced. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 9 FINANCIAL INTERMEDIARIES OTHER THAN INVESTMENT DEALERS 4 | Distinguish among the roles of the various financial institutions. So far, you have learned about the role that investment dealers play as financial intermediaries. We now discuss other financial intermediaries, including chartered banks, credit unions and caisses populaires, trust companies, insurance companies, and other types of firms that play an intermediary role in the Canadian financial services industry. CHARTERED BANKS In Canada, the primary function of the chartered banks is to accept and safeguard deposits from individuals and businesses, mainly in the form of deposits, and to then lend or transfer those funds to users, in the form of mortgages, car loans, business loans, and other lending instruments. All chartered banks in Canada operate under the Bank Act and must function within its regulatory framework. The Bank Act sets out operating rules and restrictions for banks and updates them regularly, usually through five-year revision cycles. Under the Bank Act, banks are designated as Schedule I, Schedule II, or Schedule III. Each designation has unique rules and regulations surrounding the banks’ activities. Most Canadian-owned banks are designated as Schedule I banks, whereas foreign-owned banks are either Schedule II or Schedule III banks. SCHEDULE I CHARTERED BANKS Schedule I banks are banks that are not a subsidiary of a foreign bank and are considered domestic banks even if they have foreign shareholders. According to the Bank of Canada, there are currently close to 30 domestic, Schedule I banks in operation in Canada. Six Canadian banks stand out, in terms of asset size, above all other Canadian-owned banks, as well as most other non-bank financial institutions. DID YOU KNOW? Canada’s Big Six Banks: Bank of Montreal (BMO) Canadian Imperial Bank of Commerce (CIBC) Royal Bank of Canada (RBC) Scotiabank Toronto-Dominion Bank (TD Bank Group) National Bank of Canada The six major banks have achieved their dominant asset sizes by establishing a network of thousands of retail branches and automated teller machines throughout Canada. These outlets attract and centralize most of the savings of Canadians. Schedule I banks have also expanded their international operations by acquiring or investing in foreign international financial institutions. Currently, voting shares of large Schedule I banks must be widely held, with the control of any single shareholder or group of shareholders restricted to no more than 20%. In contrast, a single shareholder (individual or company) can own up to 65% of the voting shares of a medium-sized bank, which has shareholder equity of $2 billion or more but less than $12 billion. However, the remaining 35% of the voting shares must be publicly traded. A small bank, which has shareholder equity of less than $2 billion, can be fully owned by one person or organization. © CANADIAN SECURITIES INSTITUTE (2017) 1 10 CANADIAN SECURITIES COURSE | VOLUME 1 Canadian banks offer a wide variety of consumer and commercial banking products and services, including mortgages, loans, accounts, and investments. Savings deposits are eligible for deposit insurance, which is provided by the Canada Deposit Insurance Corporation (CDIC). Banks also offer financial planning, cash management, and wealth management services—some directly and some through subsidiaries. Within the banking groups, subsidiaries also handle services such as investment dealer activities, self-directed investing, and the sale of insurance products. Current legislation allows banks to take part in diverse sectors of the financial services industry. However, the Bank Act sets controls on these activities, particularly with regard to the sharing of customer information. The barriers that inhibit information sharing across a bank’s various business units are commonly known as firewalls. EXAMPLE A bank offers chequing accounts and mortgages through its local branch. A customer visits the branch to ask about opening a self-directed investment account. The customer is then directed to the bank’s investment dealer subsidiary and receives all further related correspondence from that subsidiary. However, the bank branch has no access to any information about the customer’s brokerage account or trades. Likewise, the investment dealer subsidiary has no access to the customer’s bank account or loan balances. In this way, the operations of different businesses within the same banking group are kept separate. One major source of income for banks is the activity of lending funds to individuals or companies at an interest rate that is higher than the interest rate that the banks pay out on deposits and other borrowings. The spread between the two sets of interest rates covers the banks’ operating costs, including rent, salaries, administration, and appropriations for loan losses. The spread also provides a margin of profit for the bank. SCHEDULE II AND SCHEDULE III BANKS Schedule II banks are incorporated and operate in Canada as federally-regulated foreign bank subsidiaries. The deposits that these banks accept may be eligible for deposit insurance provided by the CDIC. The banks may also engage in all types of business permitted to a Schedule I bank. Schedule II banks derive most of their revenue from retail banking and electronic financial services. Examples of Schedule II banks in Canada include the AMEX Bank of Canada, Citibank Canada, and UBS Bank (Canada). Schedule III banks are federally-regulated foreign bank branches of foreign institutions that have been authorized under the Bank Act to do banking business in Canada. Schedule III banks tend to focus on corporate and institutional finance and investment banking. Examples of Schedule III banks in Canada include Barclays Bank, Comerica Bank, and The Bank of New York Mellon. The government allows foreign banks to operate in Canada, which in turn helps Canadian-owned Schedule I banks conduct operations abroad. Foreign-owned banks in Canada also provide a conduit for investment of foreign capital in Canada, while also providing an alternative source of borrowed funds for Canadian corporate borrowers. CREDIT UNIONS AND CAISSES POPULAIRES Credit unions and caisses populaires offer businesses and consumers a wide variety of banking services. They provide deposit taking services, lending, mortgages, mutual funds, insurance, investment dealer services, and debit and credit cards. Credit unions often cater to member-savers from common interest groups, such as consumers that live in the same neighbourhood, share similar ethnic backgrounds, or belong to the same business or social group. The federal legislation governing credit unions is the Cooperative Credit Associations Act (CCAA). This act generally limits the activities of credit unions. They can provide financial services to their members, entities in which they have a substantial investment, and certain types of co-operative institutions. They can also provide administrative, educational, and other services to co-operative credit societies. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 11 The CCAA requires associations to adhere to investment rules based on a “prudent portfolio approach”. It prohibits associations from acquiring substantial investments in entities, other than a list of authorized financial and quasi- financial entities. It also sets out a number of limits designed to restrict the exposure of associations to real property and equity securities. TRUST AND LOAN COMPANIES Federally and provincially incorporated trust companies are the only corporations in Canada authorized to engage in a trust business. Trust companies act as a trustee in charge of corporate and individual assets such as property, stocks, and bonds. They also offer a broad range of financial services that overlap services provided by the chartered banks. For example, trust companies accept savings, issue term deposits, make personal and mortgage loans, and sell registered retirement savings plans and other tax-deferred plans. In addition, they provide estate planning and asset management. INSURANCE COMPANIES The insurance industry has two main lines of business: life insurance and property and casualty insurance. Life insurance includes the following related products: Health and disability insurance Term and whole life insurance Pension plans Registered retirement savings plans Annuities Because life insurance companies act as trustees for the funds entrusted to them by policyholders, they must exercise extreme caution in selecting their investments so that they can be sure to meet future contractual obligations. Property and casualty insurance encompasses protection against loss of the following items: Home Auto Commercial business The largest aggregate premiums are generated by automobile insurance, followed by property insurance and liability insurance. Underwriting is the most important aspect of the insurance business in Canada. Insurance underwriting is the business of evaluating the risk and associated contractual responsibility that the insurance company is willing to accept in exchange for its clients’ insurance premiums. The other significant aspect of the insurance business is reinsurance. Reinsurance refers to the practice of exchanging risk between insurance companies to facilitate better risk management. DID YOU KNOW? The key federal legislation governing insurance companies is the Insurance Companies Act. This legislation grants companies enhanced powers to make consumer and corporate loans, but it also contains restrictions on activities such as in-house trust services and deposit-taking. Furthermore, it allows only life insurance companies to offer annuities and segregated funds. © CANADIAN SECURITIES INSTITUTE (2017) 1 12 CANADIAN SECURITIES COURSE | VOLUME 1 Some Canadian Schedule I banks fully own insurance companies. However, although these large domestic banks have established their own insurance subsidiaries, the Bank Act forbids them from selling insurance through their branch networks, with the exception of insurance related to loans and mortgages. OTHER FINANCIAL INTERMEDIARIES Several other financial intermediaries play an important role in the Canadian financial services industry. These businesses are categorized below according to the types of products and services they offer: Investment funds are companies or trusts that sell shares or units to the public and invest the proceeds in a diverse securities portfolio. Closed-end funds typically issue shares only at start-up or at other infrequent periods, whereas open-end funds (commonly called mutual funds) continually issue shares to investors and redeem these shares on demand. Of the two types of funds, open-end funds are by far the larger, accounting for approximately 95% of aggregate funds invested. The Alberta Treasury Branches (ATB Financial), known as savings banks, were formed in 1938 when chartered banks pulled out their branches from many smaller towns. The ATB became a provincial crown corporation in 1997 and was renamed ATB Financial in 2002. These banks provide a full range of financial services to Albertans. Consumer finance companies make direct cash loans to consumers, who are usually unable to secure a loan from a bank. Consumer finance companies typically charge higher rates of interest than banks. Sales finance companies purchase instalment sales contracts from retailers and dealers at a discount, when items such as new cars, appliances, or home improvements are bought on instalment plans by consumers. Pension plans have accounted for remarkable growth in the institutionalization of savings during the past 60 years. Canada’s changing demographic landscape has focused public attention on the future viability of the Canada Pension Plan and Québec Pension Plan. THE ROLE OF THE BANKS AND OTHER INTERMEDIARIES Apart from investment dealers, who are the intermediaries and what role do they play in the capital markets? Complete the online learning activity to assess your knowledge. FINANCIAL MARKET TRENDS 5 | Discuss the trends affecting the financial services industry in Canada and globally. Various recent trends have made an impact in Canada and around the world. Some of the more important trends are described below. FINANCIAL TECHNOLOGY Financial technology companies, known collectively as the fintech industry, take advantage of computer technology to support or enable a variety of banking and financial products and services, including online loans, electronic wallets, and automated financial planning software. The fintech industry is challenging the role of traditional financial services institutions in Canada and around the world. © CANADIAN SECURITIES INSTITUTE (2017)  CHAPTER 1 | THE CANADIAN SECURITIES INDUSTRY 1 13 ROBO-ADVISORS In recent years, a new online investment service has emerged that provides clients with advice, in contrast to the execution-only model of self-directed brokerage. Popularly known as robo-advisors, these firms began to appear in the United States after the 2008 financial crisis, but did not gain traction until 2012. By 2015, they had amassed $45 billion in assets under management. In Canada, online investment advice platforms began to proliferate in 2014, with multiple service providers registered in several provinces by mid-2016. Many variations on robo-advisor services exist in the United States and Canada, but most share several of the following attributes: They provide clients with goal-based online investment management. Portfolios are created using algorithms based on modern portfolio theory and on online client questionnaires. A telephone call with an advisor verifies that the computer-generated portfolio is suitable for the client. Advisor support is offered to varying degrees, typically online or by phone. Portfolios are built primarily with exchange-traded funds. Portfolios are regularly rebalanced. Financial planning may be offered in varying degrees. Service may be provided to the end client as well as to intermediaries such as advisors and employers. Competitive positioning is based on the client experience, which typically encompasses the following services: Ease of online navigation Speed of account opening and transfers Integration of service delivery across devices Transparency of performance and fees Portfolio management is optimized with tools such as tax-efficient rebalancing across account types. SHIFTING DEMOGRAPHICS Demographic shifts are reshaping Canada’s economy and will continue to do so. Baby boomers comprise roughly 9.5 million Canadians born between 1946 and 1965. There are also about 4.5 million Canadians who are older than baby boomers, most of whom are now in their retirement years. Much has been written on the aging population and its effect on virtually all aspects of life, including education, product delivery, and health care. Ultimately, as the Canadian population ages, we are becoming a society heavily influenced by the needs and attitudes of consumers over age 50. An important trend to monitor is the growth of the segment of Canadians over age 65. As the leading edge of the baby boomer population reaches this milestone retirement age, advisors are expected to adjust their service offering to reflect the needs of their client base, which is increasingly made up of retired Canadians. © CANADIAN SECURITIES INSTITUTE (2017) 1 14 CANADIAN SECURITIES COURSE | VOLUME 1 SUMMARY In this chapter, we discussed the following key aspects of the Canadian Securities Industry: Canadian capital markets are among the most sophisticated and efficient in the world, as indicated by the variety and size of new issues brought to the markets and the depth and liquidity of secondary market trading. The three categories of investment dealer firms are: integrated, institutional, and retail. Integrated firms offer products and services that cover all aspects of the industry. Institutional firms primarily handle the trading activity of large clients such as pension funds and mutual funds. At the retail level, full-service firms offer a wide variety of products and services, and self-directed brokers offer reduced trading rates but do not provide advice. One main role of investment dealers is to bring new issues of securities to the primary markets. They also facilitate trading in the secondary markets. These firms can act as principals or agents in either market. The Canadian chartered banks are the largest financial intermediaries in the country. They are designated as Schedule I, Schedule II, or Schedule III banks. Each designation has different rules and regulations regarding ownership levels and the types of services they are allowed to offer. Financial intermediaries offer a broad range of financial services that, in many cases, overlap with the services provided by chartered banks. Services include deposit taking and lending, debit and credit cards, mortgages, and mutual funds. Investment funds sell their shares to the public, most often in the form of closed-end or open-end funds, and invest the proceeds in diverse portfolios of securities. Loan companies make direct cash loans to consumers, who typically repay principal and interest in instalments. Pension plans represent a type of institutionalized savings. These plans are offered to the employees of many companies, institutions, and other organizations. FREQUENTLY ASKED QUESTIONS If you have any questions about this chapter, you may find answers in the online Chapter 1 FAQs. REVIEW QUESTIONS Now that you have completed this chapter, you should be ready to answer the Chapter 1 Review Questions. © CANADIAN SECURITIES INSTITUTE (2017)