Tough markets hit brokerages

“Firms are always looking at ways to enhance revenue and strengthen earnings. And right now, there is a lot of change going on,” says Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC). “Firms are amalgamating, merging or just shutting down.” The IIAC recently reported that the second quarter of this year produced the brokerage sector’s worst results in more than a decade, with more than half of retail firms losing money or just breaking even.

The IIAC report shows that the number of retail firms has fallen to 112 in 2011 from 122 before the market drop in 2008.

Over the past four years, firms have taken drastic measures to boost their wealth-management platforms, either through amalgamation or consolidation. Here are several of the major moves seen during this period:

PI Financial Corp. agreed this past August to acquire the client accounts of Union Securities Ltd. (both firms are based in Vancouver.) PI has been vocal that its growth strategy is not about looking for merger partners but for firms willing to get out of the business entirely. In addition to the client accounts, 60 Union financial advisors will be joining PI’s private-client services division.

In May 2011, Montreal-based National Bank Financial Ltd. (NBF) acquired the 83% of Winnipeg-based Wellington West Holdings Inc. that it didn’t already own for $333 million; NBF then saw its profit increase by $3 million to $34 million.

Eight months later, NBF acquired HSBC Securities (Canada) Inc., an investment firm with $14.2 billion in assets under administration (AUA) and 120 investment advisors for $206 million.

In 2009, two major players in the brokerage sector joined forces when GMP Private Client LP and Richardson Partners Financial Ltd., both of Toronto, merged to create Richardson GMP Ltd., which now has $14.5 billion in AUA.

However, rather than selling off entire operations to cope with the tough times, says Russell, some brokerage firms are downsizing in the hope of creating a more attractive, profitable organization. And that downsizing process creates opportunities for other firms.

Vancouver-based Canaccord Capital Inc. recently announced it is shutting down services at 16 of its branches, cutting 35 of its 180 advisory teams. The 16 branches that are scheduled to close are labelled as “underperformers” and account for only 16% of the $13.1 billion of client AUA in Canaccord’s Canadian wealth-management division.

Canaccord also recently announced it lost $20.6 million in its first quarter of fiscal 2013.

(This isn’t the first time Canaccord has cleaned house. In 2009, the firm let go of 75 “low-producing” advisors as part of a strategic process to rebuild the firm after the impact of the non-bank asset-backed commercial paper crisis.)

Firms may see these cost-cutting strategies as cleaning house, but competitors are seeing opportunities knocking at the door.

“I think some of the large national firms that have much higher overhead are looking to cut back a bit,” says Mark Kent, president of Calgary-based Portfolio Strategies Corp. “And I think the ones who focus primarily on retail are going to be the ones doing the most cutting. And that provides some great opportunities for us.”

Kent says his firm has been approached by advisors from Canaccord as well as by advisors from other national firms. “Advisors are always looking around,” says Kent, “to see what their options are because the payouts are considerably better on the independent side.”

To ron t o- b a s e d Ra ymo nd James Ltd. acquired Garth Turner and Scott Tomenson, an advisory team that had overseen $170 million in AUA at Wellington West before that firm was bought out by NBF. The team, which runs a fee-based business, wants to remain on an independent platform that eliminates trading fees.

“Any time there is a change or consolidation in the industry, there are opportunities available,” says Peter Kahnert, senior vice president, corporate communications and marketing, with Raymond James. “O p p or tun iti es are coming to us more readily now because people who are affected are doing their due diligence to see what their options are for the next step.”

Vancouver-based Leede Financial Markets Inc., a small regional firm with slightly more than 85 advisors on its roster, also is benefiting from the Canaccord cuts, with one advisor already set to join the Leede team.

“A lot of the big firms are constantly changing their commissions grids,” says Robert Harrison, Leede’s president and CEO, “because they have a lot of middle management [and], therefore, a lot of costs.

“It opens up opportunity for some of the other firms out there,” Harrison continues, “especially if you have seasoned advisors who have been in the industry for a long time and have very loyal clients.”

The IIAC’s Russell says that many of these “smaller-asset” advisors still run very efficient books and that smaller firms looking to build revenue and generate a profit could benefit by taking them on.

“The economics work for smaller firms taking on smaller-size [books of] advisors that don’t necessarily work for larger firms,” says Russell. “Advisors with $15- to $20-million books can find a home at a smaller firm with a much lower cost structure, and it can be a real win/win situation for both the advisor and the [new] firm.”

And as brokerage firms continue to struggle under the postfinancial crisis pressures, Russell believes that more firms will look at downsizing vs consolidation.

“Canaccord wanted to make strategic adjustments to its wealth-management business,” says Russell, “to enhance the performance and profitability of its wealth-management operations.

“We’ve seen that happen at the bank-owned dealers as well,” he adds, “with branch closures, lower performers being let go and, in many cases, the payout ratio being cut back so advisors are forced to go elsewhere.”

© 2012 Investment Executive. All rights reserved.