Owning a piece of the firm raises concerns

Each firm went public in different ways. Assante, held a traditional initial public offering on the Toronto Stock Exchange after acquiring most of its constituent parts. IPC Financial picked up many of its acquisitions after going public as a junior capital pool company. Cartier got its listing through one of its early acquisitions. And Dundee was spun off from Dundee Bancorp Inc.

Going public has given these dealers some common attributes and advantages over some of the full-service retail brokers. For one thing, these dealers now all have currency for acquisitions.
Of course, the bank-owned firms have bank stock, and some of the smaller shops offer private shares, but there’s very little public stock to be had in the Canadian brokerage business.

However, the fund dealers’ stock has proven to be a fairly weak currency for the most part. IPC sits at about $1 a share, down from a high of more than $5 in early 1999. Cartier is trading at 60¢, off from a high of about $2. Dundee is trading at about $5.35, well down from its IPO price.
Assante is holding up the best these days, trading at $9, slightly off its $9.50 IPO price.

Nevertheless, acquisition currency is an important tool in a business that still has some room for consolidation. And, for the most part, the consolidator firms have used stock liberally in their acquisitions. The notable exception is the most recent deal that saw Dundee buying Canadian First Financial Group for about $11.3 million in cash.

While the existence of a deal currency has been important when it comes to a company’s growth by acquisition, the reality is that most acquisitions in the dealer business are primarily about the advisors who are included in the deal rather than any hard assets.

So, although a public listing makes a useful deal device, it is just as important as an incentive and retention tool for the acquired advisors.

With the exception of Cartier, the fund dealer firms have used their stock to buy advisors’ books of business and otherwise cement their loyalty. They can then also use options as an ongoing compensation tool.

Cartier does have an option plan, but it doesn’t buy books of business. It reports that about 500 of the company’s top advisors among its sales force of 3,500 reps have options in the company.

The ostensible goal of giving shares and options to advisors is to help align management and producing reps’ interests with shareholders’ interests. But one of the obvious effects is to bind reps to their companies. The firms argue that they want to create some unity among their reps and give them an opportunity to build a business and participate in the upside of that activity.
Not all reps see it exactly this way. “It is difficult to build a consensus of opinion with so many independent-minded planners,” says one Assante rep based in Ontario. “But we are just happy that we’re not working at a bank.”

Many reps fear that the combination of stronger ties through share ownership, the emergence of proprietary products and the tougher regulatory regime under the new Mutual Fund Dealers Association will mean that they will lose control over their books of business.

Independence is a key issue for fund dealers, and the issue is even more acute for firms that offer their reps some sort of share ownership. Reps who have a substantial investment in their own companies may find themselves more constrained if they want to move firms. Picking up and leaving a firm is never an easy proposition. And when you own a chunk of that firm, a move becomes even more difficult, both psychologically and financially.

But the more serious issue facing reps who own shares is whether aligning their interests with shareholders’ interests may cause them to ignore, or at least marginalize, clients’ best interests. This danger is particularly relevant for dealer firms that also have in-house asset-management companies that are expected to contribute to the bottom line, as each of these four firms does.

Reps who effectively have taken a financial interest in one of the mutual fund companies that they may recommend to their clients may well be expected to look more favourably on the product offerings of that company. And the pressure is magnified because the market generally values assets under management substantially higher than it does mere assets under administration.

When reps can expect a much higher multiple for their shares by favouring the in-house fund company, they certainly may be inclined to compromise their clients’ best interests.
So far, there has not been much evidence that this issue is causing a problem. Regulators have indicated little interest in the trend. Nevertheless, at a time when industry integrity is being questioned as never before, this potential conflict of interest does concern some advisors.
One Ontario-based Cartier advisor cites “the association with the fund company” as what he considers the worst aspect of the firm. He is concerned that the financial planning dealership is too closely associated with the mutual fund company.

But Cartier has also made a point of assuring its reps’ independence. The company’s rep contracts explicitly state that its advisors own their practices. The company touts a three-pronged mantra of “independence, entrepreneurship and ownership.” Cartier sees this as a competitive advantage in an industry that is continuing to consolidate and enjoys intensifying competition.

Indeed, one Ontario-based Cartier rep cites the appreciation of independence as his firm’s best quality, noting that its contract ensures that this independence is preserved. “Overall, my feeling about Cartier is very positive. It is becoming the premier firm in Canada,” the rep says.
Nevertheless, for both firms and advisors alike, the potential for conflict has yet to overcome the appeal of share ownership. “I’d love to be a shareholder,” laments a Prairies-based planner with Winnipeg’s IQON Financial Inc.

Even at the supposedly sophisticated bank-owned investment dealers, senior executives are grappling with offering compensation schemes that turn advisors into better team players. Some of the banks have taken to issuing options to their reps in order to get the job done.
After all, most advisors already see themselves as entrepreneurs and business owners because they are running their own books of business. Giving them a share in the company will ensure that they will keep an eye on the health of that business as well. IE