... My pleasure to introduce our next speakers. From IGM Financial, James O'Sullivan, President and CEO of IGM, along with Damon Murchison, President and CEO of IG Wealth Management.
Thank you. Do you want to sit here? No, you sit beside him. Okay. Thank you.
Thank you. It's great to have you.
Good to be here. Phil, good to see you.
Hey, great to have you, and again, welcome back.
Thank you.
All right, so you've got water on the side there.
Yeah, we're good.
So again, so maybe I'll start with James. I think at your last Investor Day, you laid out some midterm growth goals. So maybe kind of start off the discussion with a bit of a recap in terms of what some of those objectives were, along with a bit of an update in terms of how you're tracking towards those goals.
Sure, happy to. And good morning, everyone. Thank you for being here. You know, Phil, Damon and I shared with our board in early August that the second quarter was easily the most satisfying quarter of our kind of five years in these chairs. We've both been in these chairs for five years now. And it's not just because it was a record quarter. It was. Earnings were up 15% year- over- year. It's not just because the trailing 12 months were a record, but they were. But I think kind of quantitatively and qualitatively, it really felt like a quarter where everything was coming together, everything was working well. And so, you know, we're really quite proud of that.
So I think, you know, when I look at what we promised in, you know, the Investor Day in December of 2023, we said, "Count on us for 9% earnings growth over rolling three to five-year periods." We beat that last year. We've beat it through the first half of this year. July was clearly a strong month, August was clearly a strong month. So, you know, I would say to you that we are, you know, very much kind of on track, in terms of, delivering against those promises. So I feel very good about the business. It was a very satisfying quarter. I think we are revealing the full potential of IGM. We're starting to see it now in earnings and in meaningful earnings growth, and we know that's very important to our shareholders.
And, you know, the one thing that I remind myself and I reminded the board when we made this point is that, you know, we're doing all of this without a penny of earnings contribution from Wealthsimple or Rockefeller. So imagine what happens when we do get the earnings contribution from Rockefeller and the earnings contribution from Wealthsimple, and both of those are obviously in kind of a high-growth mode currently. So I think we've demonstrated very good momentum in earnings in the business, and as I say, that's before we get earnings from Wealthsimple and earnings from Rockefeller, and neither of those are too far away.
Excellent. Again, I think that the year started out, I think, with some fairly challenging conditions, and I think as you mentioned, you know, things are turning. IGM's seeing this renewed momentum. Again, what are the factors you think are driving that, and again, what's your confidence level of the sustainability of the, the current growth trends?
Well, I think there's things we control and there's things we don't control. So we control the architecture or the composition of IGM Financial, and we like that. We think we have built a business here that has embedded growth, embedded diversification. Two divisions, three businesses in each division. So IG Wealth Management, Rockefeller, and Wealthsimple in wealth management, and Mackenzie Investments, China AMC, and Northleaf in asset management. So we think we've architected this well, and that has been a factor. I think for the two businesses that we own 100% of, we're executing very, very well. Damon has rebuilt IG Wealth, and I know we'll get to that, but he has rebuilt IG Wealth for success, for growth, and we're seeing that in the earnings now, you know, collectively, we're very, very proud of that.
So I think we've architected it well. I think we're executing well. Those are clearly things we control. Things we don't control, we don't control markets, and markets have been a gift. You know, just and a surprising gift. I mean, we've talked in the past, Phil, about kind of private market just being up here and public markets being here. I think the gap between them has closed somewhat. But what's really striking to me is now how private markets and public markets are doing so much better than the real economy, as I see it. So I don't think we can count on. You know, the markets have truly been a gift, and I think we're due at a minimum for a correction here.
So I don't count on markets hanging in there altogether. And then I think, you know, the other thing that drives this business, as you know, is net flows and net sales, and that is more closely tied to the real economy. And there, I think the things are coming back, but, you know, they're not at an outstanding level. And I think kind of higher rates, mortgage renewals, unemployment, and you can look at it by demographics, but all of this, I think, is having an impact on the ability of Canadians to put more money into wealth solutions. And so, you know, I think the things we control are going great. The things we don't control, I have a bit of a cautious view on, say, near term.
but over time, I think we're very, very clearly teed up to deliver that 9% or better earnings growth for our shareholders.
Okay. And again, as markets have trended up, I mean, how much operating leverage do you think is in this business?
... I think there's a fair bit. I mean, I think the beauty of this business is that you get the benefit of rising markets, you get the benefit of kind of economic growth and population growth that reflects itself through net sales and net flows. And then if you manage your costs right, which I think we have been, then I think you absolutely get operating leverage. And it's that trilogy, it's those three things together that I think make this an attractive business, combined with the fact that it consumes no capital, okay? So the thing can cash flow nicely and grow in cash flow very nicely.
I would say to you that, you know, one of the things Damon has done, and he'll speak to it, is as he has rebuilt IG, he has supported his advisors. Supported them in the value of their practices, supported them in their compensation. You know, to the extent over the past kind of 10 years, we've kind of taken fees down in IG. Kinda the house has kinda eaten most, if not all of that. Now we're at a point, I think, where we have it kind of more or less right, and we can start to get more operating leverage out of all of our businesses, including IG Wealth.
So as I look out over the next, say, three years, Phil, I would say operating leverage overall, not just the expense categories that we focus on, you know, ops and tech and business development expenses. I think overall, you know, revenue growth versus expense growth, that's gonna be a tailwind for us. It certainly should be.
All right. So if we maybe set up a bit of context, I'll call it, for the mid to longer term, kind of in your mind, what do you see as probably the most influential changes in wealth and asset management industry, again, over the next five years- 10 years, and what do you think they're gonna mean for IGM?
I'll let Damon speak to wealth management, because I love how Damon has this kind of flywheel of what he calls wealth drivers. And I think that really, the big trend in wealth management is delivering more than just investment advice, but really kind of wrapping your arms around the financial life of the client and delivering so much more. So I'll let Damon speak to that. On the asset management side, very clearly, the kind of dominant macro trend has been the emergence of alternatives, and that's been a slow boat. That has been one slow boat. But I really think we're kind of at... We're feeling the momentum now. We're feeling it in Mackenzie Northleaf on the retail side, both interval funds and OM product.
I think that really is about to sort of come the way of this industry, if you will. And we're still at kind of sub 2% levels in most wealth platforms for high net worth clients, including IG Wealth, so there's lots of upside there. But I think beyond that, I think the next thing we're gonna see, and we see it in the U.S., is I think what technology is going to enable is more personalization of wealth solutions, more customization of wealth and asset management solutions. And I think we can look forward to that. And what we're already seeing, you know, is the impact of AI in some of our investing boutiques.
So if you look at our global quant equity team out of Boston, which, you know, is just doing remarkably well in driving sales for Mackenzie as we speak, you know, Arup Datta makes the point that, you know, quant is well on its way to becoming much more of an all-weather solution. And one of the reasons it's becoming much more of an all-weather solution is because, you know, they, they're using AI. They've embedded, you know, LLMs into their business. And the business, the quant models no longer have just remarkable breadth, they've got remarkable depth as well.
I think, you know, in particular, quant is an area where I think, you know, AI is gonna have a huge impact and it will benefit us, and I think that's a rapidly developing trend as well.
Excellent. Well, again, as we mentioned before earlier on, I mean, IG Wealth has gone through a significant transformation. I think it continues to evolve. Again, I mean, what do you see as probably the best growth opportunities in Canadian wealth management, and how is IG Wealth really positioning for that?
Yeah, so let me answer that question and bridge the previous question that you asked, James, around what we see in the next three to five in terms of the major themes. We believe the major themes that are gonna drive wealth are two: demographics and AI and technology. And at the same time, we believe that we're firmly positioned as a firm to take advantage of these and compete and win for business in the mass affluent, high-net-worth, and ultra-high-net-worth segments, opportunistically ultra-high-net-worth. So let me kind of get into demographics first. There's a few things here. Number one, 32%, I've seen it as high as 50% of advisors in this country will retire within the next five years- six years.
This industry is not equipped to replace all of those advisors, and that's fact. So the future of this industry, and I've been saying this for five years, is fewer advisors, bigger books, bigger teams. Those advisors naturally will be focusing on primary markets, urban centers. We've already seen M&A. We've continued to see M&A in this sector. We believe that we're gonna continue to see M&A in this sector. What that means is less competition as it relates to advisors. So for a firm like ourselves, we're uniquely positioned to take advantage of it for a few reasons. Number one, we have a younger demographic of advisors at our firm. Number two, we have a history of cultivating advisor talent, bringing in young individuals, young advisors, and grooming them.... Number two, we're national. We're in every community across the country.
So if you have fewer advisors, fewer teams, bigger books that are centrally located, you know, you're gonna be able to compete against those firms much more effectively in the future. The second part of demographics is this, and James touched on this. We are seeing right now a reshaping of what advice means in this country, the construct of advice. For the longest time, it has been about building wealth and then helping people retire. Obviously, that is going to continue. But the paradigm has shifted. Because of our aging population, we know that there is going to be well over CAD 1 trillion passed on from one generation to the next. So it's working with Canadians to help them, through estate planning, pass on their wealth, and pass on their wealth in a tax-efficient way.
'Cause we know that we live in a country that has a heavy tax regime, so tax optimization, wealth planning, and intergenerational wealth transfer. Number two, you have three out of every four small and medium-sized businesses in this country are gonna be sold within the next 10 years. Because once again, the aging population, the owners of those businesses are aging, they wanna monetize. This will create CAD 2 trillion of wealth that is not currently in the system. So when you are working with high-net worth and ultra-high-net worth Canadians, "Yeah, okay, build my wealth and help me retire. That's important, but it's more important that you help me do these following things: Make sure that I make the right decisions and I optimize my tax position.
Make sure I can afford my retirement and do everything I wanna do, but make sure that I understand how I can pass on my wealth to the people and to the areas that I care about, and pay the least amount of money to CRA. Can you help me quantify the value of my small and medium-sized business and help me monetize that business? Can you help me explain my wealth to my kids and my heirs so they understand how intergenerational wealth is passed on, so they can continue on the legacy?
And lastly, can you help me build a legacy plan while I live to give to the causes that I care about?" When we are sitting down with mass affluent, but particularly high-net-worth and ultra-high-net-worth Canadians, this is where we start, and it has differentiated us versus the competition that continues to just focus on investment advice. And this is our differentiator. The last thing that I will say in terms of the themes is on AI and technology. AI and technology will help you decide what type of advice to provide, who to advise it to, and how to provide it, and what to charge. IG is well-positioned because we take a segmented approach to providing advice to the marketplace.
We allocate our people, resources, and advice based off of client need, from transactional need to light advice, to all the way to heavy problem-solving advice. And also, we are tech-enabled. We believe we have an industry-leading tech stack in this country that is integrated, which you never see, and it is the most dialed in as it relates to partnership with fintech in the country. So we're truly uniquely positioned because we're national, we're younger, we're everywhere, we're providing what Canadians are looking for, where they can't get elsewhere, and we are gonna benefit from AI and technology. We already are today.
Excellent. Well, again, I guess the wealth management industry is an attractive segment. There's lots of competition. Again, what gives you confidence you can maybe continue to win share against some of the large banks? And again, back to the point, what do you really think on kind of IG's, I'll call it, core source of competitive differentiation against those larger players?
Yeah. So let's break that down. Banks is... That's very broad, okay? The banks all have, as you know, five to six different distribution channels. Okay, we're not gonna compete against everyone. We're gonna compete against their PIC channel, full-service brokerage, financial planning unit, and then branch advice sometimes. That's who we're gonna compete against. How we're gonna compete and win is gonna be different versus the channels that you talk about. But let me go to this next. I think we kinda live in an environment where we try to be binary. Well, if IG wins, the banks lose, or if the banks win, IG loses, and that's not the case. So right now, IG has about a two-point, just under 3% penetration with high-net-worth households in the country. That's up from just over two, five years ago.
So we're gaining share in high-net-worth. We 2x, 3x that over the next five years, which we expect to do. IG will win. But guess what? The banks are also gonna be winning. Like, that's just fact. We can win, and with the banks winning as well, and that is exactly what is happening now. We just expect to accelerate that. How do we expect to compete? It's pretty much exactly what we talked about. Our entire organization is designed to put our advisors at the intersection of that traffic. The over CAD 1 trillion of money that's moving from one generation to the next, the over CAD 2 trillion that is moving from the monetization of small, medium-sized businesses. And think of all the clients that are gonna change hands when 30%-50% of the advisors in this country retire within the next five, six years.
Our advisors are in that traffic, and they're in it right now, and that's why we're winning, and that's why we're gaining share. It's because we have focused our resources, our product shelf, our service shelf, and our technology, and our fintech partnership, all around providing financial planning alpha. 'Cause we provide investment alpha through our investment shop, but planning alpha against tax optimization, retirement planning and readiness, estate planning, intergenerational wealth transfer, small and medium-sized business monetization, high-net-worth financial literacy, and legacy planning.
All right.
Right? And we're able to do that, and we're able to execute because we've got that segmented model, okay? Our corporate channel now provides advice to 34% of our clients, 7% of our assets, 5% of our advisors. We have taken that burden off of our entrepreneurial advisors, freed them up, so now they have deeper relationships with their existing clients, and they have now time and capacity to go after other clients, and that's driving our new client acquisition engine, and we expect that to fully continue.
Put some numbers around that. So obviously, high net worth, it's a coveted segment, so obviously it's an area of growth you kind of talked about. So maybe a bit of a two-part question. First, maybe just give us a sense in terms of what portion of IG's business it currently is, along with some aspirations and how much, I'll call it, how much proportion or what proportion of the business could it ultimately be?
Yeah, we're working on that right now, so I'm not gonna give you any definitive answers about the future. What I'll talk about is where we are today and where we came from. Right now, high net worth, million dollars or over, is 46% of our AUM or AUA. It was 36% at the last Investor Day, so it's less than two years, so that's a big jump. Mass affluent is another 39%, so we're about 85% mass affluent and high net worth. Right now, for every dollar that comes into the organization in terms of gross flows, 35% is coming from high net worth. We committed at Investor Day that'd be 33% by the end of 2028, so we've blown through that pretty quickly. We expect those to continue to be dialed up.
As we continue to invest in our corporate channel, we expect to grow that. I'd love to double that in terms of AUA, and then we can get into share of wallet in that channel and growing that channel. By doubling that, we are gonna free up our advisors, even more than we are today. And with our investment in them, their training, our product and solution shelf, and all of our partners, we fully expect them to be able to specialize in high-net-worth and, opportunistically, ultra-high-net-worth. And I'll make this clear, it's really in six different segments: small, medium-sized business owners; professionals, doctors, dentists, lawyers; executives; pre-retirees, retirees; fishers and farmers; and newcomers in the country. So we're not gonna, you know, we're not gonna cast a wide net.
We're gonna be very specific and very targeted because that's where we believe the high-end mass affluent, high-net-worth, and ultra-high-net-worth are in this country.
Excellent. I think one of the major points I think you've kind of highlighted in terms of differentiation, I mean, obviously IG Wealth's offering a range of holistic services, but in your mind, are there any new areas that you might look to expand into or, or product offerings you're thinking that are under-penetrated-
Yep
... that could represent significant growth opportunities?
Yeah, for sure. At Investors Day, we talked about... I said the number one area was estate planning. Because of what we had talked about, what I'd share with estate planning, intergenerational wealth transfer, advisors in this country can only go so far, because they cannot be executives of estates, they cannot draw up wills or powers of attorney. Those are all legal documents and whatnot. So we can advise, but we can only go so far. So it's extremely important for us that we had a partnership that allowed us to be fully integrated into that process and to advise our clients. And we were excited when we launched the ClearEstate partnership, and that has gone very well.
We're ClearEstate's number one client right now, and we're also an owner, and we fully expect that to continue to drive dividends for that firm and certainly for our firm. The other two areas that I talked about at Investor Day are a clear focus of ours, and that's insurance and mortgage and banking. On the insurance side of the business, I think we do better than most at integrating insurance into the conversation, is because we're financial planning focused. And if you're financial planning focused, then insurance and preservation of your assets and risk management is a crucial part to that, which is why we have somewhere around CAD 110 billion in face value of policies right now.
You know, we would like to significantly increase that, and we believe we're gonna be able to do it by bridging the gap between what it is like to talk about wealth and investments and what it's like to talk about insurance. Insurance is a very different sale in this country, which is why you have MGAs. It's why a lot of wealth shops only go so far with insurance. You generally top out at 30% of your advisors selling insurance. But we believe by focusing on the advisor and client experience with insurance, and then integrating the insurance into the sales process, and making it look as much like the investment side of the business, that we're gonna be able to increase our penetration, not just on the number of case count, but the size of those policies over time...
We are currently working on that right now. I'm not gonna get into that, but we're excited about the future on insurance. The next is mortgage and banking. Our core relationship there is Nesto, and that's for mortgages and home lines of credit. That is going well. We've grown that business since that partnership, and even in a tough real estate environment, we're showing very strong year-over-year growth quarter- by- quarter. We're continuing to be excited there. We've integrated mortgages and HELOCs into the financial planning conversation. We write quality business. It is good business. We're excited about that. We want to continue to grow it, as I said. But what we're missing are a few things.
Number one, if you're gonna deal with mass affluent, high net worth, and opportunistically ultra-high net worth, you're gonna want to have some type of private banking offering, and you're gonna want to be able to get into some type of specialized lending and jumbo loans and whatnot because that's gonna be able to wrap your hands around your... You're gonna be able to wrap your hands around the client. So we're working on that right now. Stay tuned. We're excited about the future as it relates to partnerships there, and then once we get that done, one of the last frontiers is commercial banking. Because we deal with so many small and medium-sized businesses, we do want to eventually go there, so, you know, that's something that we'll be looking from a partnership standpoint in the future.
Excellent. I turn over to James, again. So IGM's got over CAD 6 billion or CAD 28 per share in strategic investments that the market I don't think has given full value for. Can you talk about their strategic role and really what their measure of success is?
Yeah, and I agree with you. I think the market has not given them their full value, but I don't think that's unique to us. You know, my friends at Turtle Creek Asset Management put out a piece recently summarizing the case for markets being significantly less efficient than they were 35 years ago, and I think there's a lot of truth to that, that more people now have a view on price than they do on value, and fewer and fewer people are actually doing the work to unearth value and invest from a value perspective.
And so, you know, I think we live in a world where if you're not you know if you don't have the right float and you're not in the right indices, then your valuation is going to be constrained. And that, kind of, that is what it is, but it doesn't mean, you know, Phil, that we're powerless to deal with it. I think what we need to do is demonstrate value, and we can do that two ways. We've. For several years now, we've been advocating, and we've been promoting the sum of the parts view of this company, and I think we've been moderately successful in that.
But I think there's a segment of the market says, "That's great, but show me the earnings." And so I hear the market on that, and so I think what we need to do is translate all of this into earnings and into earnings growth, and I think you know you're starting to see that. But along the way, we'll help the market. So if there's a secondary transaction or a primary transaction out of Wealthsimple, you'll know about it, and you'll see what the market is 'cause we own 28% of it. If there's a secondary transaction or a primary transaction out of Rockefeller, you'll see it, and we'll tell you about it, and we'll mark accordingly. But as I said earlier, we've you know earnings up 15% year -over- year.
We're well on track to deliver 9% earnings growth over, I think, rolling three to five-year periods. This is without earnings contributions yet from Rockefeller and Wealthsimple, and that's coming. So I think what we've got to do is demonstrate the growth in value in these strategic investments, and there's, I've given you some examples of how we can do that. But ultimately, I think what we have to do is recognize that there's a segment of the market that's gonna say, "What are IGM's earnings?" And depending on the day, they'll multiply it by either nine or 12, and, you know, and it won't be more complicated than that. So we're gonna have to turn all of this into earnings.
The final thing we can do is that it's not... There's no point in kind of bellyaching about the markets. What we can do is buy back our shares. So this year we'll buy back 5 million. So I look at next year. We've got, you know, our kind of run rate of free cash flow is about CAD 1 billion a year, more or less. You know, our dividend's about CAD 525 million. We're gonna buy back 5 million shares this year. That's CAD 250 million+ . You know, as we start to look forward to 2026, I'm thinking, you know, we should be thinking about returning CAD 800 million-CAD 1 billion to our shareholders, which is essentially our free cash flow.
And then I think, you know, there's that is one way to deal with inefficient markets, is give it back to the shareholders. And so, you know, you are now seeing at least modestly stepped up buyback activity from us, and as we look forward to 2026, we are actively thinking about how can we potentially return more to shareholders? And along the way, we will make sure you see and hear about the growth and value of each of Rockefeller, Wealthsimple, China AMC, and Northleaf, 'cause those businesses are doing great.
Excellent. Well, it's been a great discussion. We've kind of run down the clock, but maybe in terms of one last question, closing thoughts. I mean, again, what do you think investors are really... Like, the most important thing they're overlooking about this story, and what should really excite them about the stock?
I think there's an enormous amount of embedded value there, and I think those that are doing the work, and some in this room I know are seeing it and are interested in purchasing the shares. But as I say, I really think, Phil, it comes back to, you know, I'm not a complainer. I'm not... We have to demonstrate the value, and in particular, we need to demonstrate the value through growing earnings per share, and along the way, we need to buy back shares if we think the market's not valuing us properly. And then that's not complicated, and it's not beyond the wit of man, and we're gonna do it.
Excellent. Well, it's been a great discussion. Both Damon and James, again, thank you very much for participating. We look forward to talking to you next year. And again, on behalf of Scotiabank Global Banking and Markets, certainly like to thank IGM for its continued support, so thank you.
Phil, thank you for your support.
Thank you.
Thank you, everyone.
So we're gonna take a break for lunch. It's now being served in the foyer. But stick around, 'cause at 12:15 P.M., we've got a great panel coming, which really look at, exploring some of the-