Brokers a happy bunch

2001 Brokerage Report Card
BEST CATEGORIES	1999	2000	2001
Freedom from pressure	9.4	9.4	9.4
Firm’s stability	9.0	9.2	9.3
Firm’s Ethics	8.9	9.1	9.0
Legal and compliance	8.4	8.9	8.9
 
WORST CATEGORIES	 1999	2000	2001
Ease of moving firms	N/A	6.1	5.2
Advertising	N/A	6.4	6.5
Canadian research	7.0	7.4	7.3
Account statements	6.9	7.3	7.2
* INDUSTRY AVERAGES Source: Investment Executive research

Stock markets may have cooled off in the past year but not the enthusiasm of brokers for their companies.

That is the main conclusion of this year’s Brokerage Report Card, Investment Executive’s annual inside look at what brokers are saying about the investment dealers they work for. Of course, this year’s enthusiasm may be a carry-over from 1999 and the better part of last year when stocks hit record levels, or it may be that many brokers feel the current downturn will be short-lived.

Whatever the reason, there is much good cheer all around although, as usual, there are a few dark clouds. It seems the advisors’ freedom to build their businesses the way they want comes under increasing pressure every year. While the average score of the 400-plus advisors surveyed shows little change from year to year, the individual firm scores tell a different story (see table, page C6). Brokers who work under a bank’s umbrella seem to feel the threat more than those who hang their hats at independent firms where entrepreneurial spirit — always a driving force behind the success of Canada’s retail investment advisors — is better recognized.

That could be one reason why this year’s highest-ranking firm is Edward Jones, a perennial top-performer in our annual report card. It was followed closely by three other independents, Merrill Lynch Canada Inc., Canaccord Capital Corp. and Raymond James Ltd. Bank-owned firms fill the bottom half of the standings.

Another one area in which front line advisors are handing out lower marks is in the ease of changing firms. The brokers we surveyed perceive it is getting more difficult to pick up their books and move to another firm. Last year the average ranking for all 10 national firms surveyed was a miserable 6.1, the highest scores coming from Canaccord and ScotiaMcLeod Inc., each rating a 7.2. This year the national average sank further, to 5.2, with Raymond James the highest at 7.4 and RBC Dominion Securities Inc. scoring the lowest at 2.5.

Then there are the categories that receive complaints from every firm, every year — the proverbial thorns in the sides of the country’s brokers. Every February and March IE researchers hit the phones and talk to at least 40 investment advisors from each of the 10 national brokerage houses in offices across Canada. Advisors are randomly selected from IE’s mailing list and must have a minimum of a year’s experience in the industry. They are promised anonymity.

We ask the advisors to rate their employers in 24 categories, ranging from how they feel about their firm’s client account statements to the technology used and the quality of research. Scores are on a scale from one to 10 — 10 being best — and then averaged to produce a firm’s overall score in that category.

In fact, those three categories — client account statements, technology and research — ranked among the lowest in this year’s report card, although advertising and marketing support keep them company, often invoking grunts and growls from the dealers’ front lines.

Low marks in these categories are common among all the investment dealers surveyed. “Back office sucks,” says a DS broker in Saskatoon. Front-office software gets slammed across the board as well. “Maximizer is no good,” says an advisor at BMO Nesbitt Burns Inc. in Ottawa. “I have a client who developed his own software and I use that.”

One Western-based Canaccord broker snubbed his firm’s technology. “I don’t actually use the firm’s system, I use my own quote system,” he says.

In the eight years since IE began publishing the report card, three questions have been raised consistently: Why can’t firms implement better front- and back-office software; why can’t account statements be designed more clearly; why can’t in-house research be trusted? Year after year, companies promise improvements but rarely are the changes satisfactory.

No where is that more true than on the issue of technology where two of the highest-rated firms, Merrill Lynch and Canaccord, scored the lowest.

Indeed, technology generally is incredibly expensive and never constant.

“You’re damned if you do and damned if you don’t,” says Bob Larose, national sales manager at Canaccord. “You’re always fine-tuning and upgrading.”

The Vancouver-based firm spent $8 million last year on technology and Larose says the plan is to keep spending. He says where Canaccord fails is system outages and machines going down because bandwidth isn’t big enough, not because the product isn’t good. “I’m sure the first Model T broke down all the time; now there are cars you never have to add oil,” he says. “We have to stop the outages and down times and we’re constantly upgrading, but of course the brokers notice when the system is down.”

Tech improvements ongoing

At Merrill Lynch the sentiment is much the same. “We put a lot of emphasis on training so our [advisors] learn how to use the technology better,” says Peter Kahnert, vice president and director of corporate communications in Toronto. “We have invested heavily in new hardware but it is ongoing. No company will ever get to a stage at which it can say, ‘We’ve done all we can do in technology’.”

For the past eight years, account statements have kept tech ratings company near the bottom of the pile. Each year brokers tell us much the same thing: make the statements look better and easier to read. As one Nesbitt advisor from Montreal says, echoing comments past and present: “They are messy, too busy, congested and the print is too small to read.”

“Our clients are confused,” laments a CIBC Wood Gundy broker in Calgary. Says a Moncton-based advisor with National Bank Financial Inc.:”Well, I understand everything that’s on them, but I’m not sure the clients do.”

A DS broker from Halifax says his company’s statements don’t report what the clients really want. “The mutual fund client doesn’t even know what the original investment was,” the broker says. “I’ve told them to add more distributions, turn the statements sideways and what have you, but no one listens.”

Some companies, however, do appear to listen.

“There were some complaints when I first got here last year so we asked our brokers what they wanted and asked clients what they wanted and then we fixed them,” says Canaccord’s Larose. “Our size allows us to do things more quickly.”

That may be true. For the past two years Canaccord brokers have rated their account statements second only to the rating given by their counterparts at Edward Jones.

Quality and independent research are also on the endangered list. Rankings in the Canadian research category have been sliding in recent years. When asked where he gets his research, one Edmonton based advisor with TD Evergreen Investment Services Inc. says, “Everywhere else but this firm.”

A DS advisor from Barrie, Ont. adds: “I track different fund managers. I like going by them because I feel they are more independent than the firm’s research.”

Larose says you can’t take an analyst’s word as gospel. “There isn’t an analyst out there who’s right 100% of the time. We try to educate the broker, and the broker needs to make the client understand what he’s buying,” he says.

“It’s not the analyst’s fault if a stock goes down. A lot of brokers are well-read and they use research as guidance; if you take it as word, you’re going to get burned.”

Mistrusting in-house research has sent many of the country’s advisors to the Internet (see page C14). In fact, almost everyone IE spoke with said they use the Net for research. IE