Brokers feeling squeezed

Brokers responding to Investment Executive’s 1999 brokerage report card score their firms lower than they did last year. They dress down Canada’s biggest brokerage firms for sins as diverse as poor equity research, outmoded technology systems and unreadable account statements.

In more than 400 random and confidential telephone interviews IE asked brokers at 10 national firms to rate their employers in 22 categories, on a scale of zero to 10 with 10 being the best. The advisors’ responses were tabulated and averaged to arrive at the scores posted above. IE calculates a weighted Quality Score to give each firm an ultimate rating.

So who emerges as the top firm among this year’s often stingier scores? It depends.

Based purely on the brokers’ ratings of their firm’s abilities, the clear winner is Edward Jones, for the second year running. The Canadian arm of St. Louis-based Edward Jones takes top marks in virtually every category, from research to training to ethics. Several Edward Jones brokers praise the firm for its retail focus and the level of support from management. “If I wasn’t working for Edward Jones, I wouldn’t be in this industry,” says one broker – echoing a sentiment at the firm.

Edward Jones looks like a broker’s paradise. Its top-drawer scores can be attributed in part to its unique structure: a retail-only shop built upon a technologically sophisticated network of single-broker offices, staffed by carefully recruited advisors. With no corporate finance department to appease, and no branch managers to answer to, Edward Jones creates a warm environment for its 185 brokers.

That environment comes with a price, however. The firm’s brokers also report the lowest average payout. Brokers implicitly fund many of the services their firms provide by generating commission revenue, and if we factor brokers’ estimated average payouts into our ratings we get ratings of each firm’s value to its brokers – the IE Value Score. While Edward Jones brokers generally don’t complain about lower payouts, the firm’s ranking is pushed down to the middle of the pack once payouts are incorporated. In other words, they pay for what they get.

On this basis the firm that gives its brokers the best bang for the buck is TD Evergreen Investment Services Inc. of Toronto.

The company, a perennial top performer in IE’s annual brokerage report card, shoots to the head of the class on the strength of its payout. TD Evergreen was founded on the principle of a higher – 70% – payout with the brokers picking up many of the costs traditionally paid by firms. Notwithstanding the 70% ideal, the average payout is 51.5%, weighed down by rookies who initially receive lower rates, and cover fewer costs. TD also picks up top marks for the improving corporate finance work of sister firm TD Securities Inc.

The critical payout factor also boosts the ratings of Canaccord Capital Inc. of Vancouver and Calgary’s Goepel McDermid Securities Ltd.

This is Canaccord’s first year in our survey, and the firm takes last place in our quality ratings but, given its better-than-average payout, it jumps up to a respectable sixth-place in the IE value rankings. It must also be noted that Canaccord is still absorbing last year’s acquisitions of Vancouver’s C.M. Oliver & Co. Ltd. and Brink, Hudson & Lefever Ltd.

Over the past two years our survey included C.M. Oliver, and the faltering firm ranked low. While C.M. Oliver’s scores seemed to foreshadow its imminent demise, Canaccord’s 450 brokers seem confident their firm is headed in the right direction; they even gave a first-place score for trading and execution abilities. “The change in the last two years is monumental,” gushes one Canaccord broker. “We are starting to chase what Midland [Walwyn Capital Inc.] used to be. Soon we will be the strongest independent on the street.”

Similarly Goepel rates sixth on straight broker scores, but jumps to third for value, on the strength of its better payouts. Its 300 brokers give Goepel top ratings for freedom from pressure to sell proprietary products and the firm’s fixed-income inventory.

The other firms to post above-average payouts are Lévesque Beaubien Geoffrion Inc. and industry-giant RBC Dominion Securities Inc. of Toronto.

Lévesque distinguishes itself in other ways, as well. The Montreal-based firm is the only firm that boasts an improved IE quality score year-over-year. It also took second place in both the quality and value rankings. And it gets top marks from its brokers for its client management software and its Canadian equity research. Winfred Fruehauf, Lévesque’s oil and gas and utilities analyst is most often named as the brokers’ favourite analyst. “We have changed our old ways, we have a new fresh look that I think is really working,” exclaims a Québec-based Lévesque broker.

As for DS, not only is it the biggest firm on the street with 1,650 advisors, but it also ranks among the best of the traditional bank-owned brokerages.

Yet DS’s top ranking in earlier brokerage report cards has suffered since its November 1996 acquisition of Winnipeg’s Richardson Greenshields of Canada Ltd.

This year, however, DS’ scores are generally up and it ranks third in quality and fourth in value.

The only other firm that is enjoying generally higher ratings year-over-year is Toronto-based CIBC Wood Gundy Securities Inc. Wood Gundy brokers give their firm notably higher scores for the quality of the fixed-income inventory, branch managers, ethics and image. The firm also takes a share of top spot in the freedom from pressure category. After years of languishing at the back of the pack Wood Gundy is moving up.

Despite its improved performance, Wood Gundy has not yet become a place where brokers from other firms aspire to work. TD Evergreen and DS are recognized as the favourites if brokers were moving firms. Brokers at Merrill Lynch Canada Inc., ScotiaMcLeod Inc., Wood Gundy, and Canaccord names TD Evergreen as the place they’d most like to move. Brokers at Merrill, Scotia, Gundy and Edward Jones put DS neck to neck with TD Evergreen as the firm they’d soonest join.

Although they are already at the most popular firms, brokers at TD Evergreen and DS agree that if they were forced to change teams they would most like to go to long-time rival Nesbitt Burns Inc. Nesbitt brokers are not quite as pleased with their own firm, however. They rate it only seventh for quality and ninth for value and rate it below average in most categories.

The warm feelings some brokers harbour for DS is certainly not the case for all. Brokers at Lévesque and Goepel both named DS as the firm for which they would never work.

However this may be as much an indictment of big, bank-owned brokerages as it is of DS. Brokers at Merrill, Goepel and Canaccord all said they’d least like to work for a bank-owned firm. The feeling is apparently mutual. Brokers at DS, TD Evergreen, Scotia and Wood Gundy all named Merrill Lynch as the firm to which they’d never defect – making it the least-liked firm on the street.

Merrill Lynch’s fading reputation on the street is deserved, say its own brokers. They score their own firm second from last in overall quality. The firm suffers significant ratings downgrades from last year in more than half its categories. The brokers also report lower than average payouts, which makes Merrill Lynch overall the worst value among the firms we rated.

“There has been a dramatic downloading of expenses to us, but we are not seeing compensation, there is no relief on the upside. It is not right, but it is a reality,” laments a Merrill broker.

Merrill’s fall is clearly a consequence of its transition to Wall Street ownership from independent, Toronto-based Midland Walwyn. While Midland studiously avoided Canadian bank ownership, it is now part of a huge, bureaucratic New York-based organization. Technology, training and freedom from pressure are all categories where the former Midland’s scores have fallen noticeably, and now substantially lag the national average.

“There is definitely a sign of a trend towards more pressure to sell Merrill products,” complains another Merrill Lyncher. “We get to sell less and less of what we truly want to recommend to our clients.”

“Everybody misses Midland,” agrees an Ontario-based broker, although he allows, “but Midland had its own problems.”