Close up of businessman hands making handshake - greeting, dealing, merger and acquisition concepts

In recent years, investment dealers have invested in technology in the face of increased competition, regulatory pressures and shifting customer expectations. The Covid-19 pandemic accelerated digital transformation by three to seven years, according to some estimates, as firms and their advisors adopted tech-driven tools and processes to serve clients remotely.

This transformation allowed advisors to continue finding the right financial products and services for clients, nurturing relationships and supporting anxious investors, and meeting the increased demand for more personalized, tailored advice, especially with estate, insurance and retirement planning. Focus also increased on building an active social media presence to improve client loyalty and find new clients.

Another high priority for the industry is to widen the range of financial asset classes available to clients to deepen the diversification of portfolios, improve returns and mitigate risks. This is particularly important in an environment of low interest rates for the foreseeable future. Further, lingering concerns about the pace of economic recovery and narrowing base of performing stocks suggest increased portfolio vulnerability and needed diversification to preserve portfolio value.

The large integrated investment dealers typically depend on their affiliate firms to widen access to non-conventional financial asset classes. The mid-sized and small dealers, without similar internal capability to source non-conventional asset classes, have taken various steps to widen their product shelf offering. They have established business relationships with independent registered entities with expertise in private markets asset classes spanning private equity, natural resources, infrastructure, real estate, ESG and impact investments, and private credit (e.g., commercial and residential real estate loans).

These alternatives assets are often purchased as bundled investments in the form of private placement securities for diversification purposes. Moreover, the small dealers often establish a formal relationship or partnership with the third-party entity for continued access to certain financial products. In some cases, small dealers purchase certain managed investments through a specialized IC/PM registrant.

In the last several years, a number of mid-sized and small dealers and affiliate IC/PM registrants have acquired third-party registrants with specialized expertise in private markets to provide more investment options in their discretionary managed business. Further, a number of small dealers focused on the advisory business have also acquired registrants with investing expertise to improve the depth of their product shelves and position their franchise as a “bespoke” advisory business. Some recent examples include Nicola Wealth’s acquisition of Blackwood Partners, a real estate and asset management company, in a strategic step toward offering new and innovative real estate investment offerings to high-net-worth clients and private and public institutions, and Mackenzie Financial Corporation’s acquisition of Greenchip Financial Corp., an investment boutique focused on environmental thematic investing.

We expect dealer-registrant partnerships to increase in response to the stepped-up demand for deeper portfolio diversification. These networks function as a channel or pipeline of capital from dealer clients to private companies, especially small businesses, driving innovation and growth. In many cases, private markets provide capital to businesses that cannot get it from other sources. Investors also have the opportunity to invest directly in infrastructure assets, for example, that provide essential services, improve the quality of life of residents and support economic growth across the country.

The efforts of securities regulators in recent years, as well as the Ontario Capital Markets Modernization Taskforce’s recommendations to bolster small and mid-sized dealers, will strengthen the ability of smaller dealers and specialized registrants to fund small business. What is missing is a tax incentive for the purchase of small business equity shares (like the U.K. Enterprise Investment Scheme), which would be a catalyst to accelerate capital through the small dealer-investing registrant networks.