The reorganization of GMP Capital Inc. and acquisition of GMP Securities L.P. by the U.S. broker-dealer Stifel Financial Corp. was announced this past June. Consider it a signpost. This reorganization is a marker of increasingly positive industry conditions, and a case study for future successes.
First, the transaction radiates an aura of sensible optimism – a positive view of business conditions for well-managed, independent retail and institutional dealers. Industry revenues at full-service and introducer retail firms in Canada have increased steadily over the past three years, averaging an annual rate of 15%.
Despite a levelling off in equity prices this spring, the forward momentum of fee revenue and continued expanding demand for wealth services will likely push revenue higher, albeit at a slower pace than in recent years. We estimate industry retail revenue up a further 5% this year.
That optimism is supported by an anticipation of slowing compliance and technology costs. The ongoing burden reduction exercise at the OSC and self-regulatory organizations will provide relief from regulatory compliance costs as existing rules and regulatory processes are pared back, and the rule-making and rule implementation process slows down.
New technology implementation, for competitive purposes and market compliance needs, has historically driven up fixed and operating costs, but a massive amount of front and back-office technology is now in place and is beginning to pay off by improving efficiency and productivity. Further technological needs will be more incremental than transformative, limiting outlays and future expense increases.
Second, the reorganization of GMP Capital Inc. — placing the operating entity under separate strategic board oversight — demonstrates a forward-looking approach to successfully competing in highly competitive capital markets. It is reflective of a tight focus, with board and firm strategy aligned.
The retail franchise Richardson GMP will benefit as the only independent dealer operating under the GMP Capital board, other than a specialized carrying broker. The retail firm will face the ongoing challenges of stiff competition from the integrated dealers; however, evidence indicates that nimble and effective small and mid-sized dealers have emerged to compete effectively, benefitting investors and issuers.
Many independent retail dealers like Richardson GMP have moved upstream in the wealth markets to compete with full-service dealers for the high-net-worth client, offering a sophisticated platform of integrated investment products and services through a life-cycle approach to investing. These firms have taken advantage of a nimble and non-bureaucratic approach, and a high degree of flexibility, given their relative size, to capitalize on effective client engagement.
On the other hand, other retail firms have moved in the opposite direction — downstream — to compete for the affluent mass market clientele, often focused on the millennial investor. These firms have adopted technology and worked with the online wealth platforms to build a digitalized platform of robo-investing tools, packaged investment products and a hybrid mix of online and direct advice, to offer wealth services on a cost-effective basis to middle market clients.
What these independent retail dealers have in common is that they’ve transformed organizations by sharpening their strategic focus to create a competitive advantage and value.
The new Canadian affiliate of Stifel will likely adopt a version of the approach taken by many institutional firms — broadening their corporate client base beyond resource markets to include real estate, technology and pharma. The firm may shift operations downstream, engaging in private equity financing and distribution, and merchant banking operations for small and mid-sized companies. The Stifel affiliate will have the advantage of strong research and cross-border underwriting capabilities through the parent firm to leverage business and a broader corporate clientele.
Despite the loss of independent dealers in Canadian markets, nimble and effective small and mid-sized dealers have emerged to compete effectively in the marketplace. While these firms have made strategic adjustments to improve their effectiveness, and current conditions appear positive, their eventual success will turn importantly on governments and regulators that follow through with an effective program to alleviate regulatory burden and streamline regulation in capital markets.