When clarence bick goes to conferences these days, something interesting happens. “Suddenly, I’m like a pretty girl at a party,” he says. “Everyone is hitting on me.”

As president of independent dealership Bick Financial Security Corp. in Ancaster, Ont., Bick is getting used to fielding questions from interested suitors — namely, large investment firms looking to pick up a profitable dealer. “I’m approached constantly,” he says.

At a time when mass consolidation appears inevitable — whether it’s big dealers swallowing up smaller ones or fund companies snapping up independent firms for captive distribution — Bick has managed to hold on to the small mutual fund dealership he and his brother founded in early 1993. It hasn’t always been easy. Rising compliance costs have put a squeeze on the firm’s bottom line, forcing its 18 advisors to turn away smaller investors. And deep-pocketed buyers keep knocking on the door, promising financial backing and survival.

It’s a predicament faced by small firms across Canada that are looking to strike a balance between profitability and independence. Both those registered with the Investment Dealers Association of Canada and the Mutual Funds Dealers Association of Canadasay they’re struggling to remain viable in an industry in which regulation costs are eating up revenue and, worse, draining precious human resources. Yet small dealers insist that theories of impending mass consolidation are overblown, and they’re finding ways to remain profitable in an increasingly competitive environment.

“We’ve taken a serious look at it, and we try to think rationally,” says Bick. “And, rationally, we’re profitable. Why would I walk away from that?”

That’s not to say there aren’t dealers struggling. Among the MFDA’s 170 members, 19 of them have either resigned or tendered their intention to resign in 2006 alone. The MFDA doesn’t track the reasons for resignation, nor does it keep statistics on profitability. Spokesperson Ken Woodard says the resignations could be indicative of any number of things, from migration to the IDA platform to consolidation or, in some cases, termination of the business.

The situation is more encouraging on the IDA side. According to Ian Russell, president of the Investment Industry Association of Canada in Toronto, small investment dealers aren’t just surviving; they’re thriving. Operating profits have surged 34% in the past 12 months among small dealers (identified as those with $1 million-$5 million in capital). Their businesses are getting more sophisticated, too. Fee-based revenue has grown 18% in the past year, indicating a shift to discretionary management. Small firms are also expanding their reach to advising small companies. Advisory fees still account for less than 10% of their revenue but, Russell says, that figure will grow as more dealers carve out a niche in serving small, regional businesses.

“People have been talking about consolidation for five years now, and it still hasn’t happened,” says Russell. Small dealers are using technology to compensate for the economies of scale achieved at larger firms, and they’re gaining a competitive edge by sourcing complex financial services and products through their carrying brokers. “These firms are small, they’re focused and they’ve been keeping their costs under control,” he says.

Still, the picture isn’t entirely rosy. Small dealers say compliance costs are burdensome, even in strong markets. That will only worsen in a downturn, when retail business flow tends to dry up. At the same time, lean budgets have made hiring and training young talent more difficult.

Robert Frances, president and CEO of Montreal-based Peak Financial Group, is sympathetic to the plight of dealers of all stripes, but says size has little to do with profitability. Peak started out as a mutual fund dealer 14 years ago, then added an insurance arm in 1998 and a securities dealer in 2000. Today, the firm employs 500 people and manages $4 billion in assets.

“From what we’ve observed, big companies go bankrupt and small companies can do very well. And vice versa,” Frances says.

Peak’s biggest expense isn’t running three platforms, Frances says, but the lack of regulatory harmonization. “We report to 19 regulators,” he says. “It’s absurd. It doesn’t matter if you’re big or small, that makes no sense.”

The majority of Peak’s revenue comes from mutual fund sales — even in the firm’s securities arm, for which mutual funds account for 60% of revenue. Frances credits the firm’s consistent profitability to the fact that it isn’t “distracted” by proprietary products.

@page_break@“Having in-house products is like having two value propositions for the advisor,” he says. “It gives you two products to manage: one is your back office and the other is a mutual fund. To us, that means you’re supporting your management team in two businesses. And it’s very difficult.”

Simple cost controls can go a long way in maintaining profitability, says Dave Sanders, president of Edmonton-based securities dealer Sanders Wealth Management Group Ltd. Sanders and his founding partner, Art Beckingham, started Sanders Wealth in 1993, and they’ve been watching their costs ever since. The firm’s nine advisors rely on word of mouth for marketing, and a partnership with carrying broker NBCN Inc. has helped reduce back-office expenses.

Still, costs have crept in. The IDA requirement for all member firms to have a chief financial officer, for example, was particularly costly for Sanders. Before the rule came into force in 2004, the firm had a perfectly acceptable CFO through NBCN.

“I’m all for the rules. But some of them don’t apply to small dealers,” Sanders says. “But we have no choice but to be compliant.”

Toronto-based MGI Securities Inc. is a something of a hybrid in the investment industry. Created by founding partners Don McFarlane and Crawford Gordon in 1999, MGI started out as a small private-client firm and eventually formed a relationship with holding company start-up Jovian Capital Corp. As a wholly owned subsidiary of Jovian, MGI is neither bank-owned nor entirely independent. Its structure is one that current president and CEO Lewis Reford calls “the best of both worlds.

“The basic struggle among integrated firms is growth,” Reford says. “Retail tends to be a slower-growing market with smaller margins, while capital markets is a transactional business that has the potential for lucrative returns, but they can be lumpy and volatile.”

As part of Jovian, MGI has all the “out of the box” legal, accounting and technology expertise without any of the interference or product-pushing of a financial conglomerate, Reford says.

But, says David Beazley, president and CEO of Acadian Securities Inc. in Halifax, being small and fully independent also has its advantages. Acadian’s 18 advisors operate out of three offices in Nova Scotia, where the firm has managed to scoop up the small underwriting deals that big bank-owned dealers tend to ignore. One-third of the firm’s business is institutional, yet, Beazley says, a strong retail client base is its bread and butter.

“There are a lot of people out there who feel like they get better attention from us,” he says.

“We’re less inclined to work as individuals who just promote our own interests,” Beazley adds. “The team approach makes everyone genuinely interested in how the firm is doing.”

Small dealers — which often offer advisors equity participation — savour the team approach and are looking for long-term commitment.

“If advisors can simply pick up and move to another dealer, they have less stake in helping us grow and less stake in being compliant,” Bick explains. “We’re looking for individuals who understand they have to do things right or else it affects the reputation of 17 other advisors.”

As for the future of small dealers, Frances says, it will ultimately depend on advisors themselves — if they want to thrive, they’ll thrive: “Advisors have decided that they don’t want to give up independence. The only reason consolidators and other firms are in business is because advisors have allowed them to be.” IE