Payouts are being cut to the bone, support levels are eroding and those expensive new computer systems never work quite right. No wonder many brokers are thinking about going it alone.
Those who participated in Investment Executive’s ’99 Brokerage Report Card report an average payout of just over 43%, and that’s before the government takes its half. In return for the sacrificed revenue, some brokers are still stuck with manually operated order entry systems, unreadable client account statements and schizophrenic proprietary computer systems. On top of the shortage of in-house support at some firms, there is an increasing push to sell in-house products.
One option is a move to a firm such as TD Evergreen Investment Services Inc. which offers up to a 70% payout, with brokers paying all their own business costs. Its brokers particularly applaud the firm for allowing them the independence to run their own business. About 50% of Evergreen brokers rate freedom from the pressure to sell proprietary products as their firm’s best quality.
‘[TD] lets me run my own show the way I want. If you are independent and hardworking, you succeed,’ says one broker.
Yet a number of brokers in the survey, including several from TD Evergreen, say they dream of starting their own firm. Historically, the infrastructure costs of running an independent investment advisory business has made it prohibitive for most. But as payouts and services continue to decline, striking out alone becomes more attractive. Even TD Evergreen’s brokers average a 51.51% payout these days.
With the services of a clearing broker, such as Correspondent Network, a wholly owned subsidiary of First Marathon Securities Ltd., or TD Correspondent Services, advisors get the flexibility to build their own business model. For example, members of the Correspondent Network – the introducing brokers – can offer clients a full slate of equities, fixed-income, mutual funds and options. They can trade on all the major North American and European stock exchanges, including over-the-counter markets. The firm has its own fixed-income desk and its members have access to First Marathon’s syndication desk, so they can participate in new issues.
David Burnes, chief operating officer at Correspondent Network in Toronto, says introducing brokers pay a per-trade fee based on the security and the type of ticket. He estimates the average trade runs about $30.
Burnes estimates the average broker can realistically expect a 65%-70% payout in an introducing-carrying broker arrangement at the end of the day, though the rate fluctuates with the type of business. That’s a far cry from 43%, but it’s not the embarrassment of riches some brokers might expect by starting their own firm. It’s also not for the faint of heart. ‘If you’re the type of broker who turns off the screen at 5 p.m., or relies on [his or her] firm for new issues and new ideas, then this probably isn’t for you,’ cautions Burnes. ‘You have to have a very independent mindset and your own ideas.’
Taking control of their own ideas is one factor that drove Brian Worth and four partners to start their own firm three years ago. Worth, chairman of Vancouver-based UCC United Capital Corp., says the firm was formed in a bid for greater independence. ‘We wanted the freedom to execute our own business decisions and not toe the corporate line,’ says Worth. So far he calls the decision a success, noting the firm has been profitable from day one. He’s satisfied from an independence point of view as well. ‘We can deliver what we want to clients … with all the services of a national firm,’ he says.
With the introducing-clearing broker relationship, small firms can offer a variety of accounts, ranging from basic investment and RRSP accounts to short, hedge and margin accounts. Online order entry is used for most products and most accounts can be opened online, too.
Beyond the bare necessities, other services are available from Correspondent Network. It offers online access to Canadian research from First Marathon and U.S. research from New York-based brokerage Donaldson, Lufkin & Jenrette. Clients receive its standard brokerage account statements, although brokers are still responsible for producing their own portfolio reporting. It also offers integrated payroll services.
The wealth of technology-based resources makes it easier to function without a great deal of infrastructure. The advent of Web-based delivery for everything from stock quotes to research makes it possible to run a lean small office. Worth says his firm has 20 employees, only four of whom are support staff, but he believes ‘we’d need 40 people in here if we had our own back office.’
How well do these clearing brokers treat their clients? Brokers at Mississauga, Ont.-based Edward Jones say they do just fine. Edward Jones clears its trades through the Correspondent Network. This year its brokers give their trading and execution ability a score of 8.7, rating it above the national average and just a couple of ticks behind top-rated Canaccord Capital Inc., which rates a 9.1. One Edward Jones broker calls its system ‘as close to perfect as we can be.’
Burnes estimates a group of brokers needs about $1 million in collective annual production and $500,000 in equity capital, with $260,000 of that as straight regulatory capital, to make a go of it as a small independent.