Brokers insist their firms are stable

The past year has seen plenty of realignment within the brokerage industry. While the deals and ownership changes among the smaller firms were normal, the blockbuster event of the year came when Merrill Lynch Canada Inc. hived off its retail brokers to CIBC World Markets Inc. to team up with its retail arm, CIBC Wood Gundy. But, despite this major shift in the landscape, brokers continue to give top scores to their firms’ stability in this year’s Brokerage Report Card.

While the Merrill-CIBC deal came as something of a surprise late last year, sellouts and buyouts, mergers and acquisitions have been the rule rather than the exception during the course of our report card. In fact, in the past 10 years, there is barely a firm in our survey that has escaped the industry’s game of musical chairs: we’ve seen RBC Dominion Securities Inc. snap up Richardson Greenshields Ltd. before being rebranded as RBC Investments; Midland Walwyn Ltd. became Merrill Lynch, only to join Wood Gundy a few years later; Goepel Shields & Partners Inc. and McDermid St. Lawrence Securities Ltd. got together to become Goepel McDermid Inc. in 1998, and has since become Raymond James Ltd.; Lévesque Beaubien Geoffrion Inc. swallowed First Marathon Securities Ltd. and became National Bank Financial Inc.; Nesbitt Thomson Inc. and Burns Fry Ltd. got hitched before becoming BMO Nesbitt Burns Inc.; and Canaccord Capital Corp. has picked up its share of small firms.

Edward Jones and TD Evergreen, a division of TD Securities Inc., have not been players in this wheeling and dealing, but both firms have profited from the disruption in the industry by grabbing brokers from other firms.

All this means plenty of turmoil for brokers. Those who are involved in deals may find themselves operating on strange, new platforms, under new names and forced out of their branches. “Four years, three firms, one desk” is how one Raymond James broker in Vancouver describes his past few years.

Others will simply pull up stakes to escape an unwanted merger, moving to another firm. So even firms and brokers who aren’t directly part of a merger are often affected by its fallout. “We’re not operating in a vacuum,” says a ScotiaMcLeod Inc. broker on the West Coast.

“We haven’t been involved, but it tends to affect everyone,” an East Coast ScotiaMcLeod broker agrees.

The impact comes in several ways. Mega-mergers, such as the CIBC Wood Gundy-Merrill Lynch Canada deal, naturally raise the bar on what constitutes critical mass for firms, putting more pressure on the rest of the industry to match its increasing scale, scope and efficiencies. These deals also press unhappy brokers and clients to move firms. And they help set the market for brokers looking to switch firms.

Merger mania has been positive for business, says a broker with Raymond James in Vancouver, who contends that clients tend to flee the turmoil that inevitably follows a shakeout. “Every time those big boys go play, I get more clients,” he says.

Yet despite all this upheaval and its far-reaching impact on the industry, brokers remain doggedly convinced of their firms’ stability. On average, stability is one of the highest-rated categories in our report card. The national average score is 8.1 out of 10, one of only four categories to receive such high scores across the board — along with freedom from pressure, ethics and compliance.

Perpetually top-ranked Edward Jones takes first-place honours in the stability category. And it may be the one firm that has a justifiable claim to superior stability. The most radical change it has made since coming to Canada is dropping the “D” from its original brand name, Edward D. Jones. St. Louis, Mo.-based Jones has been around for 80 years in the U.S., and has always skipped the mergers and acquisitions carousel, painstakingly building its business one broker at a time. And it has never been a big recruiter of other firms’ brokers, preferring to nurture and train its own raw talent.

After Edward Jones, four of the big five bank-owned firms — RBC Investments, ScotiaMcLeod, BMO Nesbitt Burns and CIBC Wood Gundy — are ranked as most stable by their respective sales forces. Yet all these firms have been involved in mergers in the past few years, if you include Scotia’s recent purchase of Charles Schwab Canada Co.

But despite their tendency to be active players in the consolidation game, as far as brokers are concerned being bank-owned appears give the stamp of stability. Tellingly, four of the five highest-scoring firms in the stability category also receive below average scores in the “ease of moving firms” category; in other words, brokers tend to find stability at firms they would find difficult to leave.

While the bank-owned firms are generally perceived as very stable, the exception to that rule this year is TD Evergreen. Despite being bank-owned, the firm’s stability rating has taken a plunge with its sales force, who have apparently come to doubt the firm’s commitment to the business. The big problem has clearly been its move away from the generous payout system on which the firm was founded, with most of its brokers being put on a traditional grid system.

The firm has publicly declared its intention to keep building its retail brokerage business. But money talks in this industry and other firms that have tried to stay in business by cutting pay have seen their best assets walk out the door. Evergreen had its first taste of defections this month when 12 advisors moved to National Bank Financial in Toronto. Cutting the payout system has undermined some brokers’ confidence in their firms.

It didn’t help TD’s credibility that it failed to land Merrill Lynch’s retail business when it was on auction late last year. Not only did TD miss a chance to build critical mass in one fell swoop, it also lost precious ground to rival CIBC.

It seems it takes these sorts of substantial disruptions to make brokers believe that their firms may not be as secure as they assume. The only other brokerage to garner a drastically below-average score in the stability column is Toronto’s Yorkton Securities Inc. While TD’s brokers may be gripped with fear about the bank’s intentions for their business, at Yorkton the sting of scandal has them cautious about their future.

Earlier this year, when several Yorkton executives were sanctioned by regulators, the allegations did not accuse the firm’s retail business of any wrongdoing. Investment bankers, traders and analysts all faced allegations, but retail was left unscathed. Any firm that is fighting to repair a soiled public image is going to have an uphill fight. And Yorkton’s brokers appear to understand that their business is not a sure thing, either.

Brokers who have been through this sort of turmoil seem to have a more sanguine view of their firms’ stability. The truth is that nothing is forever in this business.

Embracing this reality, one Ontario-based broker with Canaccord Capital is already psyching himself up to welcome his firm’s next possible move with open arms. “We were Midland, C.M. Oliver, now Canaccord. I know we are looking to match with an insurance company and [Manulife Financial Corp. is] looking for a brokerage. It seems like a pretty nice fit to me,” he says. IE