Despite their reputation for avarice, money is not everything for financial advisors. What really makes them happy with their firms is the warm fuzzy intangibles such as corporate culture, the freedom to run their own businesses and the freedom to move if they choose.
When the banks went on their brokerage buying spree in the late 1980s and early ‘90s, the mid-sized to large independent brokerage firms all but disappeared. And by the mid-‘90s, MidlandWalwyn Capital Inc. was the only major alternative to working at a bank owned firm. The other retail firms were mostly small boutiques, and there was no room in the middle.
But a strange thing happened in the past few years. Smaller, independent alternatives have begun to flourish. Once again, retail brokers have a choice between the bank-owned firms and a selection of credible, stable independents. There are the grown-up independents, Vancouver’s Canaccord Capital Corp. and Raymond James Ltd.; First Associates Investments Inc., the new firm being built from the ground up by former Midland management at Toronto’s Rockwater Capital Corp.; and upstarts from the evolving mutual fund distributors, such as Dundee Securities Corp. of Toronto and Burlington, Ont.-based Berkshire Securities Inc. (see page C6)
There is now space for these firms for several reasons. For one, technology makes it possible for smaller firms to compete efficiently with bigger rivals. There has also been considerable consolidation among the independents, leaving the surviving firms stronger. And fund-dealer firms pushing into the full-service world are bringing their proficiency at running relatively large, lean, independent sales forces. Then there is the U.S. money that has come into the business in the form of Edward Jones and Raymond James, which both offer unique business models.
At the same time, the supply of brokers for these firms is ample, as bank-owned firms are pushing their smaller producers out the door. The bank-owned firms are increasingly asking their sales forces to focus on high net-worth clients as they slough off smaller clients and smaller brokers.
The bank-owned firms are also taking greater control of brokers’ businesses by insisting they, not the brokers, own the clients. Partly to assert that control and partly to pad their own asset-management businesses, the bank-owned firms have also begun to push their proprietary managed products to clients. These products not only provide a steady, fee-based income rather than volatile, trading income- but also help immobilized client assets at the firm.
The banks’ interest in stable, predictable earnings growth is preeminent. And, the surveyed brokers tell us, the bank culture is slowly smothering the once independent culture coveted by brokers. That, as much as anything, has enabled the resurrection of the independent brokerage houses.
The appeal and success of these smaller, independent alternatives is evident in the scores brokers give their firms in the 2003 Brokerage Report Card. Comparing this year’s scores for the bank-owned firms with the smaller independents, it is clear that what the smaller firms give away in capital and financial resources, they more than make up in the freedom and flexibility they provide their brokers.
For the purpose this article, we consider all bank-owned firms as big firms. While a firm such as TD Waterhouse Investment Advice doesn’t have a scale force as large as the one fielded by CIBC Wood Gundy, it still counts as a big firm because its sales force is subject to the bank bureaucracy that determines many of the characteristics on which brokers rate their firms.
Comparing the scores of the big firms to the smaller ones makes it clear the smaller players have an advantage as far as brokers are concerned. Head to head, the smaller firms score higher than the big ones in 21 out of 27 categories. In the over all category, smaller firms rate almost a full point higher than the big firms on average-8.1 for the small firms, vs an overall 7.2 for the big firms.
The smaller firms biggest advantages are payout, corporate culture and freedom to move firms, in these, smaller firms score an average 1.8 points, 1.3 and 1.3 points higher, respectively.
In each area, the smaller firms appear to have a competitive advantage. Being small, independent and often employee-owned allows firms the latitude to pay brokers more handsomely. The pressure on the grid, and the continual nickel-and-diming of the bank-owned firms doesn’t appear to afflict the smaller firms as much.