Summary:
As we approach the release of the next—2025—edition of The Household Balance Sheet Report in Canada, we take a deeper look at state of the union of Canadian household wealth. Carlos Cardone, Managing Director for ISS Market Intelligence Canada team, joins Goshka Folda, Head of ISS Research, to help her unpack household financial behavior over the past several years.
From the feast of the vast savings buoying inflows into investment funds and deposits of the pandemic years to the more recent inflow famine on the investment side, the podcast explains key factors driving household financial product choices. And since no country is an island, household behaviors observed in Canada are relevant to listeners around the world as we observe similar patterns reverberate around the globe.
Transcript:
Goshka: Welcome to MI Talk, the podcast series brought to you by ISS Market Intelligence, and thank you so much for tuning in. The focus of our discussions and MI Talk is the global regional financial services industry in all its various aspects, subsectors, asset management, life insurance, banking, fintech. We don’t discriminate. We talk about it all because we love this business. For more than three decades ISS Market Intelligence and its predecessor companies have been at the forefront of industry discussions, with the financial services ecosystem. And, we have been passionate students of this business. The specialty of this particular podcast is to really try to, uncover the second day story. So really look under the hood of some major developments and really focus on the whys, the how and the future. So with the great assistance from many industry experts, both internal to our organization and external, and many thought leaders. And I will shortly introduce our guest today who truly, hits on both counts. We took a bit of a break this summer because we felt that we needed to give our creative juices a little bit of a reboot. Our thinking about the business. But we took advantage of these not so lazy days of summer to meet with an extraordinary array of industry executives and ecosystem participants. And I think that we have learned so much and our guests today will really help me to share some of those really powerful thoughts that we have gathered. But we’re now back to our monthly schedule. So please, if you enjoy this episode of MI Talk, remember to subscribe to MI Talk. Remember to subscribe to our podcast on your preferred podcast platform. Now that I have chatted away and you still don’t know who I am, I am Goshka Folda, I am your host and Global Head of Research at ISS Market Intelligence, which is part of the broad ISS STOXX organization. Thinking into the next year, which is 2025 for those in Canada in the industry, you might recall that all the years are our publication of our big flagship publication, biannual House Balance Sheet report. So next year, clearly we’re already in the throes of thinking about the business and thinking a decade ahead, which is always quite difficult. And kind of daunting for us. But I thought, why don’t we now do a bit of a pulse check on or the, the state of the Union of the Canadian household financial wealth. And to help me dig into this particular topic and kind of unpack what’s been happening over the past two years since the publication of our previous household balance sheet report in ‘2 is none other than, a repeat guest, Carlos from the intelligence Canada team. Carlos truly needs no introduction to our Canadian listeners, but for those outside of Canada, let me just tell you that Carlos is our industry’s renaissance man here in Canada leading our Canadian research on a variety of and a very, very wide range of topics and always adding new things to his repertoire. Household wealth is, he’s the leader of our thinking on that topic. Financial products are increasingly lots of distribution or delivery paradigm topics as well. Carlos is in massive demand as an industry speaker, and he truly is one of those people who has his ear extremely closely to the ground when it comes to industry developments and kind of the as we talked about that second what’s under the hood of those. Now as a fun fact. You know, that I always like to introduce that for those repeat listeners about our guests. Not only a great and now it seems like a lifelong friend of mine, Carlos, has just qualified, this past few months as a sailor and is an incredible source of knowledge of all things about philosophy. And I hear that he is about to get into a new musical instrument. So did I mention that Carlos was a Renaissance man? He indeed is. Welcome Carlos.
Carlos: Thank you. Thank you very much. First of all, it’s a pleasure to be here.
Goshka: Thank you, Carlos. So let’s, dig right into it. Let’s start with your overall assessment where Canadian households are in terms of their financial wealth, you know, since our ’21, ’23, HBS report forecast, we have seen a couple, you know, a few volatile years to say the least, from a variety of perspectives. So what are kind of your latest take on the financial wealth, the growth and how it’s been. What have been the main factors impacting, that, in the past couple of years?
Carlos: Yes, you’re entirely correct. Not only volatile years, but also, very interesting model of our household balance sheet, all these data that we have on everything, products and distribution and everything, financial wealth, you won’t find a very similar scenario to what we have been through over the last couple of years. As you know, as interest rates started to increase, that triggered a very significant asset reallocation. And we entered a period where, you know, when, inflation accelerated, the cost of servicing debt also, increased. And that had a very direct impact on household capacity to save the, household savings, overall, which, you know, this is a metric that we usually expect to hit around $150 billion a year or so in terms of net new savings, from the household sector. We saw that, coming down to virtually zero. And this is the financial crisis, 2008, 2009, when we see, something like that. Now, the counterparty to that, which is very interesting, and we’re going to dig a little bit deeper in this podcast. On is that we had a huge asset reallocation across products, across distribution channels, across segments in multiple ways. This is the kind of scenario that creates, big opportunities. If you are on the, on the right product, on the right distribution model at the right time. But also very significant, for many other financial services providers.
Goshka: Yeah. So that’s, that’s a really key point, Carlos, that you are landing that we’re now kind of living in that odd land of zero close to zero new savings inflows. So, you know, there must be just furious competition through that reallocation, because really, if there are no new flows, products and product manufacturers have to compete for them. So can you, kind of tell us exactly what products and what parts of the balance sheet are benefiting and which are kind of losing ground in the face of still, you know, elevated interest rates, even though I guess we’re heading into another decrease. But we all seen that, this coming Wednesday.
Carlos: The take away game. You probably Goshka remember when we started to write about a future when, the household balance sheet, the denominator for financial assets will become so large and so many people will be in the de saving face, which is, actually the case. We say, social work, 45% of household financial wealth. And we are under circumstances where what you actually see is a big rotation of assets at any given point. You know, we have, a rotation if you want, clockwise and counterclockwise over the last couple of years because we had first interest rates increasing. Now, as you mentioned, interest rates come down. And of course, coming down, which is also creating, very, very interesting outcomes in terms of how money is moving around. If we start at the point when, interest rates started to move in, the first half of 2022, what we saw force as a consequence of that as interest rate increased, fixed income, in particular, equities lost ground not only in terms of market effect, but also in terms of appeal. And then, of course, we had deposits, the deposit industry, receiving extraordinary, historic amount of net new money, coming their way GICs in particular, of course, fixed on deposits in an environment of higher interest rates made, a lot of sense and something, you know, if you want to make a little bit of history, and as I mentioned before taking into account that so many houses have been moving to the de-saving phase over the last several years, by virtue of the fact that interest rates were low before 2022, we had not seen GICs growing tremendously over that decade. The rate prior to, to 2022, prior to the pandemic, really for the most part in that kind of environment you have expecting, of course, more money going towards a product like GIC. But interest rates of course, validated that strategy. And we saw, almost $400 billion going at two and a half years or so. So, you know, from the perspective of a bank type of organization, this environment was not entirely negative of course. They saw, some, very, very clear weaknesses in terms of flows into riskier asset classes like mutual funds, in particular through the branch system and all of that and sales in those type of products, of course, stalled and became net redemptions, over this period of time. But of course, they were able generally to recapture goods of, for example, GIC, which was that category that was growing very, very fast over this period.
Goshka: Yes. That is a stunning number, that 400 billion. Right. Like you just explained to us that, I mean, in a good year, you’re expecting 150 billion to come onto the balance sheet and to all categories of financial products. Right, Carlos? And now we’re talking about two and a half years, like, you know, all the inflows plus some in an environment where the inflows are actually not even on a net basis big into the household balance sheet. Right?
Carlos: Yeah. The power of the take away game and the reallocation of these huge amounts of money, talking about the denominator something that I should have mentioned before. The number that we know for sure at the end of 2023, the latest update, the $6.7 trillion in discretionary financial assets, very, very large, of course, by, all standards. We are finalizing the numbers through, June of this year. So the first half and it’s very, very clear at this point that we have surpassed for the first time the $7 trillion mark. I’m sure that you probably remember, Goshka, when we started to put these metrics together about, 25 years ago or so, we were looking at a few hundred billion dollars in, in financial wealth, I mean, tremendous growth. The opportunity for financial service providers growing tremendously also, on that, but not without its challenges. Right? I think that we continue to see an environment, where, pricing, of course, is, very, very, important. We continue to see a shift in many cases towards pricing models that require significant scale for service providers to make it work for business. Very, very, interesting environment overall, but for sure, plenty of opportunity for those that come with the right product and are able to attract advisor. And increasingly, of course, self-directed investors attention. Right. We’re seeing tremendous growth in the self-directed, channels also having an impact on deposits. You know, very, very interesting to, to see that reporting in the household balance sheet in connection with deposits has been the de-branching, we call it, of the, of the business. Right. Potentially more of these is connected to GICs and other deposit types moving away from the traditional mechanism of the bank branches to the credit union branches, also and more of these assets shifting towards advice channels and increasingly also self-directed channels. And we have seen, of course, through this cycle that I mentioned before, these extraordinary flows into fixed term deposits. Good part of that coming through the branches. Good part of that, of course, as usual, coming through the core advice channels, Full-Service brokerage in particular, brokers are always very, very quick to take advantage of, opportunities provided by the marketplace. And of course, when interest rates started to hit around 5% or so in three year term type GICs and everything, we saw a lot of, money coming from the full service brokerages on that. But we are now also seeing increasingly more and more flows into, for example, GICs coming from online discount brokerages. The fixed term deposit is gaining ground in that channel. And, something that we have been, of course, reporting over the years in our research is that more clients, more accounts are being opened in the channel, more dollars are moving, in many cases the financial services providers behind this channel are pushing clients in that direction, creating a more scalable, modeled or better tool software for clients to use. Applying that in general, of course, is more open to things by themselves. And these, in, in general. So very, very interesting to see. Also, these transformations occur along the lines of the distribution channel, paradigm shift.
Goshka: Yeah. And that’s so interesting, Carlos. And this is even before we’re going to get into, you know, sooner or later, it’s been later for Canada, the era of neo banking, right. We haven’t even gone into that digital mode altogether. I know we have, a few kind of start ups, but, we’re just working with our Mumbai team and an incredible thanks around the world. And, of course, I think that in Canada that that will also accelerate what you pointed out, the kind of diversification of the channels that are available for deposits to reach also self-directed investors. So really interesting, Carlos. Just to wrap up and we could, you and I could speak about this for hours, literally. So I have to get you back in the next month as you kind of wrap up your thinking. And the team I know is working on the story to wrap up the year on the investment fund side, I know there’s one in November and then there is one in January where we kind of, industry in Canada. But, you know, I think that we need to at least, maybe, telegraph a little bit what’s been going on, on the investment fund side. And clearly, just like we’ve seen and maybe actually a bit slower in Canada until a few years ago, but globally, a transition away from the active mutual funds towards ETFs of all shapes and sizes, including active ETFs. So, what has been happening in Canada, you know, in that, keeping in mind that enormous influx of money into deposits, what’s been happening on the investment side and, and ETFs specifically.
Carlos: So as a minimum, we have to split the story into two, mutual funds on one side, ETFs on the other, very different dynamics, some substitution effects between the two. Absolutely. No question. But, you know, ETFs, I think in general are doing a lot more than substituting for mutual funds. They’re also very effectively substituting for direct securities, becoming very, very effective at replacing bond allocations in particular, but also equities. I think this is generally, a key moving target for product developers on the ETF side of things, right, to try to target specific opportunities, to try to target things that maybe advisors will be doing, buying themselves, using secured, trying to bring a product that does that effectively and the right price and everything. And along those lines, of course, we’ve seen an evolution of the ETF shelf see that expand globally. But to some extent, it started in Canada, at least in connection with some of that, particularly that trend that you mentioned about active ETFs, which, of course, when we talk about active ETF, we’re not necessarily talking about the same type of activation that we have traditionally seen in mutual funds. Usually with ETFs, we talk about degrees of activation, strategies that have some active component, to some extent, in some cases almost automated their strategy and of course, something that remains truth and something that remains unchanged from the first time that we wrote about it probably 15 or so years ago, Goshka, is that ETFs are found increasingly everywhere. Anything that comes up, I think that ETFs find a way to fit into distribution paradigms, advice or practice models, as underlying assets to other investments. More recently, during this period of higher interest rates and everything, ETFs adapted to bring deposit like, underlying assets to the market, right. There were companies launching, ETFs of high interest savings accounts and a lot that we see in a constant evolution of ETFs that good markets but markets seems to secure the basis for money coming their way off structure. And of course, no surprise to see that virtually all asset managers in Canada have now moved in that, in that direction. The vast majority of the companies that had, strong roots for the mutual fund, side of the business and everything have families of ETF, right now that, of course, in many cases are working extremely well with advisors. I think one of the key targets, of course, for the industry have been to understand how advisors do business, what they need in terms of products and catering to, to that as effectively as possible, a high degree of success in the case of ETFs, but also increasingly, of course, to self-directed investors. We have seen a tremendous success of the ETF product in online brokerages with asset allocators. These are products that in our research we call the ETFs of ETFs, right. The funds of funds of ETFs that are entirely exchange traded are a basket of, underlying ETFs that is constantly rebalanced and have resonated loudly with self-directed investors. I think if 15 or 20 years ago we had asked anyone in the online discount brokerage if they thought that asset allocation was a good idea, was a good product idea for that channel, I think that most people have said that no, that here people are trading, they’re not really interested in asset allocation, but we have these products allocation models, and appropriate pricing, of course, and self-correcting investors find, valuable. And we also see, of course, money coming in that, in that direction. And of course, given the environment, given everything else that’s been happening, in the markets, we’ve seen mutual funds, markets, across institution channels, but particularly in bank branches going in net redemptions for the best part of two and a half years, but into 2024, with markets now pumping very positive results, you’re starting to see, of course, that investors, advisors, also, of course, are, opening up to riskier, asset classes. Right. If you look year-to-date, you actually find that, global equity and U.S. equity are the best selling, for both ETFs and mutual funds. It’s been, the best part of almost three years since we’ve seen those asset classes getting closer to the top. So the environment changed in 2021, 2022, with interest rates, with market gyrations and all of that. And it’s very, very, very clearly changing counterclockwise. If you want. Once again.
Goshka: Yeah, that’s just absolutely fascinating. Again, Carlos, we need a lot more time with you. And we’re going to book that in the next couple of months. But, thank you so much. You’ve given us so many interesting tidbits. I’ve written copious amounts of notes here. The 7 trillion, I think this is the first time we’re floating that number out there. I know that June is barely, barely baking right now in the oven, for our, this crushing financial asset or financial wealth investable asset measure. That’s a fantastical number. I agree, Carlos, when we think about the last 20 years since, you’ve been, you know, more than, with us, it has been just an incredible journey. And, and so, so, so cool what you talked about that ETF agility on the horizon with the direct indexing technologies, etc. So even ETFs might be starting, getting, back into being disintermediated. But let’s see how that that’ll take certainly a good, good time. Now, let me just finish up. So thank you so much, Carlos. I will, you know, keep tabs on your thinking. And we certainly want to go back to the kind of, looking at the outlook for, for a while. But you just pointed out that depending on the year, depending on the conditions, so much is going on, it remains so interest and, and always, always changing, which is really why we love observing this business. So that is a wrap for this episode. This episode will be followed by a kind of, one, two punch we are trying to create with the household wealth, our frequent guest, Christopher Davis, the US industry, in parallel, consideration of what is happening to the household demand and investment upfront, industry outlook south of the border. So we’ll have Christopher kind of connect to some of the points that that Carlos has discussed, plus we have so many interesting research pieces, rushing to the finish line before, the end of the year. I will, keep you posted on some of those, but probably, the best way to keep abreast of all new and current releases from ISS Market Intelligence is to join the growing community of global financial services, analysts, executives, observers, and what I call our global public square, with great, homage to, to Fareed Zakaria for the GPS concept, which is a Sunday program on CNN, which is really our kind of MarketSage portal and, where we put all of our latest releases and feel free to go to MarketSage and register. So we are keeping abreast of our various research, so plentiful in any given year, our global, MI research team releases north of 300 different pieces, quite overwhelming. Around the world, and, and, we hope to see you at, MarketSage portal that you will join us here, on, the upcoming episode of this podcast. As always, I always encourage you to ping us with ideas about specific topics that you would like for us to speak about and seek specific industry guests. Please, just give us those ideas, either through our social media or through email. And at this stage, thank you very much. And on behalf of ISS Market Intelligence, I wish you a wonderful and productive closing frame of 2024.
About the series:
MI Talk, a podcast series brought to you by ISS Market Intelligence (MI), delivers global coverage of developments in the asset management, wealth management, insurance, and distribution industries. Each episode features ISS MI’s experts in conversation about topical issues, trends, and developments that are shaping the market intelligence landscape, specifically, and global financial services industry more broadly. Financial services professionals focused on funds, annuities, insurance, mortgages, and related areas will find MI Talk particularly helpful in staying abreast of what’s of import across the industry.