Whoever would have thought the boisterous, joke-playing, testosterone-driven culture of Canada’s national brokerage firms would be in peril?
Yet, after talking to over 400 brokers at Canada’s 10 national investment dealers, researchers for Investment Executive’s seventh annual Brokerage Report Card found the evidence clear: the brokerage culture is in grave danger of being overwhelmed by the quiet-spoken, grey-clad bankers. That puts brokers as we know them today in grave danger of becoming obsolete.
Brokers we spoke to at the bank-owned investment dealers lament the loss of their “entrepreneurial spirit” and complain that the bankers have taken the reins. “Upper management doesn’t come from the brokerage side of the industry any more,” says a TD Evergreen Investment Services Inc. broker from Ontario. “I don’t think it’s a good idea to have a brokerage run by bankers.”
In the decade and more since banks began buying or building brokerage firms, bankers been edging their way into the brokerage business. But in the past year, brokers have developed the sense that the bankers are elbowing their way in. At the most obvious level, the change has come as the banks built wealth-management divisions. Retail brokers have been plucked from their natural habitat, in which they lived an uneasy but familiar coexistence with the institutional business, and have been dropped into large retail financial services machines.
Retail has never had much love for the institutional side, but at least both sides knew their role. Now retail brokers find themselves as just another cog in large divisions incorporating mutual funds, insurance, discount brokerage and other retail investment services.
The growing bank influence is evident in our Brokerage Report Card results. For several years the report’s top-rated firm was RBC Dominion Securities Inc. It was then knocked off its perch by TD Evergreen, a bank-owned brokerage to be sure, but one that was launched to cater to brokers. In the past few years, the bank-owned firms have slipped from sight altogether, and the rankings have been ruled by independents such as Edward Jones Canada and, this year, by Vancouver’s Canaccord Capital Corp.
Brokers are scoring their firm’s strategy lower, too. This year none of the bank-owned firms managed above average scores for their strategy. Notable drops came at DS and CIBC Wood Gundy. Only Canaccord and Goepel McDermid Inc. managed strong gains.
Brokers are being driven away from the bank-owned firms and into the waiting arms of old-school brokerages such as Canaccord, which still place some value on individualism. Many brokers who have made their way to the independent side of the street treasure the greater sense of freedom, saying they would never work at a bank-owned firm.
“They are too bureaucratic and they are trying to get brokers to think like bankers,” says an Ontario-based broker at Goepel. “They don’t have the broker psychology; there is too much going by the book and not enough emphasis on the individual broker.”
The ultra conservative banks don’t have much time for “broker psychology.” Brokers used to be considered the cowboys of the financial world. But in the past decade, since banks were allowed to buy their firms, the anything-goes spirit has ebbed away.
To some, this is a good thing. Coming under the banks’ influence has done away with a lot of the excesses that made brokers notorious.
Gone too is some of the machismo and ruthlessness that prevailed among brokers. But rather than replacing the dirty old ways with aggressive, clean operations, the bank-owned firms have simply become asset machines whirring in the midst of very large factories. Without their own culture, brokers are being alienated from their own identity and from their clients.
Under the auspices of the banks, brokerages are quickly becoming just one of several distribution channels. As the banks get better at Internet delivery, brokers are becoming expendable. In preparation for those days, the bank-owned firms are slowly taking greater control of the brokerages’ clients. Brokers are being pushed to offer more fee-based proprietary products to their clients. The products are magic for the firms. Not only are they comparatively expensive for clients, they offer the steady income stream bank analysts appreciate. The firms no longer have to rely on commission revenues generated by unpredictable capital markets. Most important, though, the products also tie the client to the firm rather than the broker. Not only is it harder for clients to leave and follow their brokers to new firms, it is harder for clients to leave, period.
Brokers at bank-owned firms also say the banks are putting a heavier hand on brokers’ books. The banks’ desire for more fee income has them revising payout grids to make selling fee-based products more attractive. Brokers are all being pushed to pursue the same group of high-net-worth clients. The smaller clients can go discount or buy the bank’s mutual funds until they are wealthy enough to earn some personal attention. A DS broker from Ontario warns, “There’s a push to controlling the style of the book. There’s a push to fewer and larger clients, and there’s a lot of book culling happening to junior brokers.”
The same market segmentation strategy that has worked for the banks in its retail banking business is now finding its way into the retail brokerage end, too.
“It’s fee, fee, fee for everything,” laments a DS broker. “They download the work to consumers and then charge them for it. It’s just like the bank machines.”
The move to try to shape the role of brokers to fit bank strategy has also taken a lot of spark out of the brokers, who finger the fee-based products as a culprit.
“Bankers like the wealth-management programs; clients don’t really count. What they are concerned with is less liability for the brokers. Brokers can’t be sued because they aren’t directly responsible,” says a Montreal-based broker at a bank-owned firm.
Of course, there’s nothing wrong with keeping brokers on the straight and narrow, but there’s also some sense that they’ve lost their edge. If all the big brokerage firms are offering the same thing and brokers themselves are kept on a short leash, the industry becomes increasingly bland and brokers are more expendable.
There’s already considerable evidence of a brain drain from the financial industry into more glamorous careers at high-tech firms. Industry veterans are leaving for greener pastures. And with no room for individuality at the major firms, innovative types will either find homes at smaller firms on the industry’s fringe, or look outside the financial industry altogether.