The independent dealer business is taking a hit with the news that boutique brokerage firm, Fraser Mackenzie Ltd., intends to wind up the firm and withdraw from the regulated securities industry, given the weak returns it’s generating from that business.
The firm announced that, at a meeting on April 29, the shareholders of the firm’s parent company, Fraser Mackenzie Holdings Inc., voted in favour of resigning from the Investment Industry Regulatory Organization of Canada (IIROC) and dissolving the company.
In a statement announcing its decision, the firm points to the current economic and market conditions, along with the increased regulatory burden, for its decision. “Our assessment of the current business climate has led the owners to conclude that deploying our capital in the continuance of our regulated investment dealer businesses can no longer generate an acceptable rate of return,” it says.
In particular, it notes that institutional interest in the junior resource companies that have been the firm’s focus, “has dried up”, along with equity trading activity in these companies. At the same time, it notes that “the regulatory cost burden is increasing”.
“On balance, it makes sense for our shareholders to re-deploy their capital,” it concludes.
The Investment Industry Association of Canada (IIAC) has flagged these trends of declining industry revenues and rising regulatory costs as a gathering threat to the industry’s small firms. In recent industry statistics, it reports that the composition of industry revenues and profits has shifted notably over the past few years in favour of the large integrated dealers, at the expense of the industry’s boutiques.
“The viability of the smaller boutique firms is threatened, unless a market turnaround occurs in the near term,” warned IIAC president and CEO, Ian Russell, in a recent letter to the industry; adding, “The financial squeeze faced by small boutique firms does not just threaten them. Ultimately, it threatens investors, and small and mid-cap issuers, posing a hazard to competitive and liquid markets for efficient securities trading and financing.”
In addition to FML, two other firms, Loewen, Ondaatje, McCutcheon Ltd. and optionsXpress Canada Corp., have also recently announced their intention to resign from IIROC. However, a new Calgary-based firm, GHS Securities Canada Ltd., also joined IIROC at the start of the month.
FML says that in the coming months its business will shift toward the private equity market. It says it will “re-focus on the activities being carried out by our merchant banking group, Fraser Mackenzie Merchant Capital [which] “currently works with private companies assisting them with capital raising and other advisory services and is in the process of establishing a mezzanine debt and a private equity fund to meet the wider financing needs of private companies.”