Given increasingly onerous regulatory requirements and tough competition from big banks, survival has been difficult for many independent investment dealers. Some have disappeared entirely; others have merged with competitors.

Doug Leyland, president and branch manager of Burlington, Ont.-based yourCFO Advisory Group Inc. (registered with the Investment Industry Regulatory Organization of Canada [IIROC]), knows of these pressures firsthand.

Fifteen years ago, Leyland left a large, bank-owned firm to start his own independent firm with the intention of continuing to work with his clients while providing a platform for like-minded financial advisors. Leyland’s goal was to provide advisors with the regulatory and back-office requirements they need to run independent practices.

But now, he says, “We’ve been systematically squeezed out” by growing regulatory costs, intense competition and other factors.

Leyland is selling his firm of 25 advisors with $750 million in assets under management (AUM) to Mississauga, Ont.-based Investment Planning Counsel Inc., a larger, independent wealth-management company.

“The independent model is an attractive one for the entrepreneur with an established book of business,” says Leyland, who recruited advisors with minimum book sizes of $25 million and offered a 90% payout. (In comparison, the average bank payout runs around the 40% mark.) “I would have liked to have continued as a small, independent dealer, but so much has changed in the regulatory world since 2000.”

Investment Executive recently spoke with Leyland about his experience. (Some of his remarks were edited for space.):

Q: When you first entered the industry, you worked for a large, bank-owned dealer. What was it about this model that you were not comfortable with?

A: The economics of it. I felt there was indirect pressure to promote the firm’s manufactured products. I was in the top 20 in Canada by book size, and I just looked at what I was paying to the house. [It offers] a buffet of services and you have to pay for them whether you use them or not. We don’t need all those services, but that is how the banks are all run today and one of the main reasons why I turned to the principal agent model [PAM].

I always thought that someone who had a $40-million book in this environment had a pretty decent business … and could make a pretty good living. It seems like the banks have increasingly been squeezing [smaller books] out of the business because they are not profitable enough, I presume.

But a big part of the problem is this fear around who owns the client. So, the advisor is thinking, “Well if I leave and go over to yourCFO, how many of my clients am I going to retain?” It’s always the biggest concern.

Q: How do you think advisors’ lack of movement will affect their clients?

A: Independence is a question of fact. It is not to say an advisor can’t work through a bank-owned dealer and not be completely independent, in terms of the advice and recommendations they give their clients. But I think it’s a lot [to expect].

Q: As a small dealer in the PAM, what issues led to your decision to sell your business?

A: Every time the regulator’s requirements increase, the costs of doing business rise. And then your critical mass has to grow to support that. You have two choices: you either increase the price you charge for your services or you increase the number of advisors you are providing these services to.

It is extremely difficult to attract new advisors because you are competing with the large firms that are both manufacturers and service providers. It has always been way more profitable to be on the manufacturing end of the business than on the advice and distribution end. So, I found it very difficult to recruit and grow and stay ahead of the growing regulation.

And it is not just [regulations from IIROC]. There is the Personal Information Protection and Electronic Documents Act and the anti-money laundering certifications.

But there are other issues that come into play that aren’t regulatory-related; just the realities of running a small business.

For me, a year and a half ago, my chief compliance officer became ill and had to leave work. As a small business, it’s difficult to go out and recruit someone who has the skill set to run compliance at a small dealer.

Then, I learned of the concept of vicarious liability, which is something I had never heard of before. One day, I come into work and we had been named in a claim. It turns out that one of our advisors had been introducing some of her clients to what turned out to be a fraudulent mortgage scheme.

While we had no knowledge of [this fraud] happening, our name was linked to it. It took a couple of years, and a whole lot of legal time, just to persuade the errors and omissions [E&O] provider to respond and cover us in terms of our defence. We eventually got released from [the claim] and it has all been resolved.

Q: Did that have a major financial impact on your firm?

A: Oh, yeah – the minute you mention lawyers. Also, E&O providers are going to respond differently to the bigger, bank-owned brokerages than when you are a small entity. When you are a small entity, if [E&O insurers] think they [don’t have to] respond, they won’t. At least, that is my experience.

Q: Were there any other specific regulatory changes that influenced your decision to sell?

A: It is the changes in the client relationship model that are coming down the pipeline – having to disclose all the additional information to clients and have the systems and ability to generate that information.

There are a lot of good things in regulation. But, sometimes, [regulators] use a nuclear warhead to get rid of an anthill – things such as archiving emails for five years because there were a few situations where emails got destroyed.

Q: What do you think small dealers can do to survive in this environment?

A: The only thing I think could work is shared ownership of a business, where the advisors own a significant portion of the dealer. A group of advisors would need to have at least $1 billion or $2 billion in AUM to open a small dealer. And they also need to have a common interest in keeping the dealership going.

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