Industry News

Investment industry performance improves, but the outlook for smaller firms remains uncertain

By James Langton |

Operating profits in the Canadian brokerage industry are forecast to rise by more than 30% this year, but many boutique firms are still struggling, according to the Investment Industry Association of Canada (IIAC). It has advice for both firms and regulators to shore up the boutique end of the business.  

In the latest industry letter from IIAC president and CEO, Ian Russell, the trade group reports that overall industry revenues and profits are up so far through the first half of this year, as equity markets have proven resilient, and cost control efforts are bolstering firms' bottom lines. If the first half results are extrapolated over the rest of this year, the IIAC forecasts that revenue and operating profit will be up 16% and 32%, year-over-year, respectively.

All major segments of the industry are seeing their profits rebound, with struggling retail firms more than doubling their profits, institutional firms seeing a 39% jump, and the large, integrated dealers enjoying a 27% gain year-over-year. The gains are less impressive at the integrated dealers because their business has held up relatively well in recent years. Indeed, the IIAC says that if its projections for 2014 materialize, the integrated firms will have had two straight years of operating profits that are higher than pre-crisis levels.

Retail revenues have been powering the integrated firms over the past couple of years, the IIAC reports, with these revenues up by two-thirds over that period. And, it points out that their fee-driven revenues have been a particular advantage, as these revenues now exceed commission revenues; and, the integrated dealers have seen fee-based revenues grow by 20% per year for the past five years, compared with 7% annual growth at the boutiques.

Indeed, notwithstanding their recent profit rebound, the boutique firms will still be well below their pre-crisis profit levels, the IIAC says. And, it reports that a gap has opened between the self-clearing retail boutiques, and the introducers, with the self-clearing firms enjoying 38% revenue growth over the past couple of years, compared to just 28% at the introducing firms.

On the institutional side, the boutiques are also losing ground to the integrated firms, the IIAC says, as the larger firms are making plays for smaller deals amid overall weak issuance activity in the small- and mid-cap markets generally, and the resource sector in particular.

The outlook for the boutique firms remains uncertain too, the IIAC suggests. "The boutiques have managed solid improvement in revenue and earnings by boosting retail and underwriting revenues in response to strengthened equity markets, and containing operating costs. But it will be difficult to replicate this outcome in the next year or so, even with continued strong revenue gains, given expected ratcheting up of compliance and technology costs, particularly as the new CRM disclosure requirements become effective," says IIAC president and CEO, Ian Russell.

Indeed, the IIAC says that 22 boutique firms have exited the industry over the past year, either through acquisition, simply closing their doors, or decamping for the exempt market. And, as some of the larger boutiques have been strengthened through this culling of the herd, more consolidation could be on the horizon. 

To help support the boutique sector, the IIAC has a handful of recommendations. It suggests that regulators allow firms to employ reps that are limited to mutual fund licences to help build scale at these firms; and, it recommends allowing small issuers to distribute securities without a prospectus or offering memorandum through registered reps, subject to normal KYC and suitability requirements, and SRO oversight.

For the dealers themselves, the IIAC also provides a number of prescriptions for survival in the years ahead, including that they try to build their fee-based retail businesses, differentiate themselves from the large firms by focusing on more speculative segments of the market, and that they target less affluent clients that are currently being served by financial planners. It also suggests that firms could build strength through continued consolidation, greater outsourcing, and building up their sales forces in terms of both recruiting younger advisors and beefing up their capabilities.