The amalgamation of the self-regulatory organizations (SRO) helped position dealers for growth and innovation, and could continue to do so as the dealer rules are consolidated. At the same time, the potential for further industry consolidation looms, and larger economic and market challenges add to industry pressures.
The 2023 merger of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) to create the Canadian Investment Regulatory Organization (CIRO) levelled the regulatory playing field for dealers. Developing and implementing a single set of dealer rules is an ongoing initiative, and CIRO plans to publish the entire proposed consolidated rulebook for comment this winter.
“It’s an interesting time to be in the industry,” said Chris Climo, a partner with C&N Regulatory Consulting in Toronto. He said that “medium-sized” industry firms, as opposed to big integrated firms, are well positioned under SRO consolidation, as they “now have the ability to actually take on the bigger players in an efficient, effective way they never had before.”
Still, the main beneficiaries of SRO consolidation are “the major players who have multiple platforms,” Climo said. “That’s basically the banks, larger companies and global players.”
As big firms streamline their back offices into a single legal and compliance structure under one SRO, they can identify areas to drive synergies and operating efficiencies. A 2020 Deloitte LLP report projected operational savings of up to $490 million over 10 years for dual-platform firms.
But for a firm looking to combine platforms, the process can be complex when each has its own systems, advisors and processes. Further, cost structures can shift to the upside if, say, automation results in lower staff headcount but higher staff salaries that come with enhanced skills.
The playing field continues to favour the big players in one important aspect: They can lure top-tier advisory talent with multimillion-dollar signing or retention bonuses. Further, the big players are getting even bigger: Mubadala Capital, the alternative asset management division of sovereign wealth fund Mubadala Investment Company, took CI Financial Corp. private in a $4.7-billion deal that closed in August. Subsequently, CI Financial’s U.S. subsidiary Corient announced two European-based acquisitions.
CI also owns Assante Capital Management Ltd.
In addition to Assante, 10 firms so far are registered with CIRO as both a mutual fund and investment dealer, representing a range of assets under management. The list includes Designed Securities Ltd., iA Private Wealth Inc., IG Wealth Management Inc., Manulife Wealth Inc. and Worldsource Wealth Management Inc.
For mutual fund dealers, certain changes under CIRO’s proposed consolidated rules have “significant” implications, said Borden Ladner Gervais LLP (BLG) in a blog post during the phase-four consultation period (there have been five). BLG referenced risk management; business conduct and client account rules; and approval and proficiency of directors, executives, chief financial officers and supervisors (formerly branch managers). Hiring a CFO with a financial accounting designation, potentially, would be a new cost for a smaller dealer that currently employs bookkeepers.
Creative destruction
The changes, which tend to default to IIROC rules, represent opportunity. Other important proposals for mutual fund dealers include those related to introducing/carrying broker relationships and the ability for Level 4 fund dealers, which are permitted to offer nominee accounts, to offer margin accounts provided they meet solvency requirements.
“We were in a static competitive environment for several years prior to SRO harmonization,” said Matthew Latimer, executive director of the Federation of Independent Dealers (FID). Now, there are opportunities to “adjust business models and take advantage of a more harmonized playing field,” he said. A harmonized approach to direct commissions is an ongoing project that could “enable creative destruction and new avenues for business building,” he said.
The FID was formerly the Federation of Mutual Fund Dealers. When it rebranded in March 2024 to represent both mutual fund and investment dealers, the organization said in a release that it would support independent dealers as they “launch and expand their dual-platform and managed money innovations.”
Michael Konopaski, co-founder and CFO of Designed Securities Ltd. in Toronto, said SRO consolidation can be a catalyst for small mutual fund dealers to build a “more innovative” business. Referring to his own firm, he said, “We’re actually having fun. If you have the right business model, an imagination and you work hard, you don’t see challenges in the same way.”
Mark Kent, president and CEO of Portfolio Strategies Corp. in Calgary, said, “Change is tough for a lot of older, small firms that have always done things a certain way.” Some mutual fund dealers are “hanging on by their fingernails” instead of investing in the business, he said.
Kent said the average age of the dealer’s advisors is decreasing, and younger advisors tend to want more investment options for clients. Portfolio Strategies, which offers ETFs and liquid alts, is currently working on creating a modernized back-office system in preparation for dual registration under CIRO.
New costs related to regulation and technology put pressure on dealers’ margins. Latimer suggested that as dealers incur these costs, pay grids could shift. Larger market pressures are also at play, including Canada’s stalled productivity and capital markets growth.
“We’ve seen consolidation in the investment dealer space,” attributable in part to increased regulation, Climo said. “I think that tells us we’re going to see a similar thing in the mutual fund dealer space” as the dealer rules are consolidated.
That could mean smaller independents merging or being bought by larger players, he said: “We’ve seen both in the investment dealer space.” A recent example is iA Financial Corp.’s acquisition of RF Capital Group, which adds Richardson Wealth Ltd. to iA Wealth’s network.
Since the great financial crisis in 2008, the number of investment dealers (integrated, retail and institutional) dropped from 200 to 163 last year (18.5%), based on data compiled by the Canadian Forum for Financial Markets (CFFiM).
On the mutual fund dealer side, 79 dealers are registered with CIRO, including both integrated- and single-platform firms (but not those dual-registered as both types of dealer). In 2020, the MFDA had 86 dealer members, according to the regulator’s 2022 client research report.
PwC Canada projected significant mergers and acquisitions in financial services this year, particularly in wealth management. One factor driving the trend is the need for small shops to gain scale via tech, PwC said.
Investment Planning Counsel Inc. (IPC), a subsidiary of Canada Life (both firms are under Power Corp.), acquired the wealth assets of mutual fund dealer De Thomas Wealth Management Corp. in a deal expected to close by the end of September. In a release, De Thomas president and CEO Tony De Thomasis cited IPC’s tools and discretionary platform, as well as its advisor succession program, as advantages arising from the deal.
Independent dealer seeks same
Like the FID, other trade organizations have rebranded or formed anew recently, although SRO consolidation wasn’t necessarily a motivating factor.
Jim Dale, CEO of Leede Financial Inc. in Calgary, said that a couple of years ago he and some other investment dealers looked to join resources to participate in regulatory consultations. “There really was a void,” Dale said, because the small and independent dealers committee at the former Investment Industry Association of Canada (IIAC) was no longer supported. Dale had chaired the committee for many years.
Dale met Annie Sinigagliese, most recently with Croesus and the IIAC, who started a consulting business in 2024 for investment dealers — the Canadian Independent Finance and Innovation Counsel (CIFIC). Dale now chairs an independent dealer group with the CIFIC. In addition to contributing to regulatory consultations, the CIFIC, which is a corporation, supports operations and business growth for dealer clients.
Meanwhile, the IIAC rebranded this past June as the CFFiM, which the association said recognized its mandate to improve the competitiveness of Canada’s financial markets. Regarding the small and independent dealers committee, CEO Laura Paglia said, “We don’t limit our work with boutique and independent dealers to one committee. We work with them across the board … on all issues.”
The former Investment Funds Institute of Canada (IFIC), which mostly served investment managers and larger mutual fund dealers, was probably the association most affected by SRO consolidation, Climo said. In March, IFIC rebranded to the Securities and Investment Management Association (SIMA), to include capital markets and wealth management.
Climo’s firm advised SIMA on the expanded mandate. SIMA is “very much like SIFMA [Securities Industry and Financial Markets Association] in the U.S.,” he said, which has a membership of investment dealers, investment banks and investment managers. For bigger firms, SIMA can be a one-stop shop that addresses the concerns of their various arms, he said. The former IFIC “recognized that this is really an integrated industry,” and “SRO consolidation probably sped up SIMA’s iteration.”
Konopaski says the industry still needs a place where peers can exchange business ideas and strategy — related to consolidation and AI, for example. “Most organizations are following a more reactive dialogue” in response to regulatory developments, he said. “There is no forum for thought leaders.”
Further, “If I want to … share ideas with somebody at a table in Toronto, I don’t want the person … to go through three layers of management [for] permission to talk,” Konopaski said. To have an open discussion, “independence matters.”
This article appears in the September issue of Investment Executive. Read the digital edition or read the articles online.