Canada’s institutional investors have succeeded in driving down the commissions they pay to equity brokerage firms while maintaining access to broker research and other services, according to a new report from Greenwich Associates. However, the report warns that tougher times could be ahead.

Greenwich suggests that Canadian investment institutions might soon see cutbacks in the amount of research provided by equity brokers, and a regulatory review of soft dollars (commissions used by investors to pay for research and services); as has happened in the United States.

“Institutions that believe the downward trend in equity trading commissions can continue indefinitely are in for a reality check,” says Greenwich Associates consultant Lea Hansen. “Margins that get thinner and thinner will eventually require brokers to begin rationalizing service levels vis-à-vis profitability. That likely means focusing resources and attention on top-three relationships.”

Greenwich Associates’ 2004 North American equities research reveals that Canadian institutions — to a greater extent than their counterparts in the U.S. — have ratcheted down trading costs without sacrificing highly valued brokerage research and service. “The fact that Canadian equity commissions have been driven lower than those in the United States for a considerable period of time suggests that Canadian brokers might soon follow the example of their U.S. counterparts,” Hansen notes.

If Canadian brokers do take the lead of U.S. firms, Canada’s institutional investors will face a reallocation of brokerage resources in which research and services are increasingly allocated according to institutions’ relative profitability to their brokers. Equally important for Canadian institutions is the question of whether securities regulators will follow the example of their peers in the U.S. and the U.K., who appear to be undertaking an aggressive review of the soft-dollar business.

Commission rates have been on the decline in Canada for almost a decade and institutions expect to see further reductions in the coming 12 months. Average commission rates for agency trades have fallen from 4.6¢ per share to 4.4¢ per share over the past three years, and the participants in Greenwich Associates’ recent study report that they expect per-share commission rates to fall to 4.3¢ in the next 12 months.