Corporate cogs vs cowboys

Everyone agrees that basic differences exist between the two extremes. Those who like the security of big firms tend to cite factors such as reputation and financial stability. They knock the entrepreneurial style of the smaller firms, accusing them of running dodgier operations. On the flip side, brokers at smaller firms argue their shops are more dynamic and they have greater freedom than their cousins trapped within the soulless corporate behemoth.

Although the juxtaposition is stark, the fact is both sides are right. Thanks to market consolidation, the range of choices is growing limited as brokerages in pursuit of market power and economies of scale have swallowed the mid-sized, independent firms. Brokers have but two choices when deciding which type of firm best fits their style – big or small.

‘The big firms are very similar,’ opines one of 1,372 brokers at Nesbitt Burns Inc. ‘Unless you hate your branch manager there is no reason to move. They’re pretty much all the same.’

The big brokerage firms are all struggling to shoehorn the entrepreneurial brokerage culture into the big corporate mould – a task that is repulsive to some small-leaning brokers. A Western broker with Canaccord Capital Inc. names the industry’s biggest retail firm, RBC Dominion Securities Inc. as the one place he’d never work. ‘They lost the entrepreneurial spirit,’ he says. ‘They are just a big conglomerate now.’

Feeling of isolation

DS might not be ready for conglomerate status just yet but it does boast Canada’s biggest retail force, 1,650 strong, and that, admits some DS brokers, can foster a feeling of isolation. ‘They could improve communications and get a bit more input from brokers before decisions are made,’ suggests a Toronto-based DS broker. ‘Also, sometimes they tend to lump people together … they need to be more individualistic towards brokers.’

If brokers toiling in Toronto feel irrelevant at a big firm, outlying branch life can be even more alienating. A broker formerly with Richardson Greenshields of Canada Ltd., who has hung on at DS since it acquired RichGreen, complains that the big Toronto firm is out of touch with its branches. ‘It was better when we were with RichGreen … We hardly ever see any area managers or people from Toronto coming up to the branches – they’re too busy being big shots in Toronto, I guess. This was not the case with RichGreen … these guys are Neanderthals by comparison.’

Brokers at the smaller firms, even the bank-owned ones, boast it’s easier to get heard at their shops. While Canaccord’s brokers claim they can win an audience with their legendary chairman, Peter Brown, even brokers at small, bank-owned TD Evergreen Investment Services Inc. say their executives are similarly accessible.

So, despite the fact that bank ownership is often thought to confer all the negative effects of being big, the size of the firm itself seems to be a critical factor. Along with TD Evergreen, smaller bank-owned firms Lévesque Beaubien Geoffrion Inc. and CIBC Wood Gundy Securities Inc. tend to rate more favourably than their bigger competitors, bank-owned or not.

Big is certainly an issue for brokers at the former Midland Walwyn Capital Inc. They were keen to avoid bank ownership and the introduction of bank culture yet, while new owner Merrill Lynch & Co. Inc. isn’t a bank, it does a great impersonation of one. It has market capitalization of US$35 billion, more than twice the market cap of Canada’s largest bank. So it is naturally saddled with a large bureaucracy. One Merrill broker characterizes his firm’s image as ‘the big, bad empire.’

Clumsy monoliths

The truth is, bank or not, big firms tend to lose the dynamism that is the hallmark of the brokerage business. They get big to enjoy economies of scale in areas such as technology, marketing and compliance, but in an effort to wring out all the benefits of being big, these firms almost inevitably become clumsy monoliths. They often take a long time to make decisions and even longer to implement them. While the big firms can afford big systems, rollouts seem to take forever and, by the time all the bugs are ironed out, the technology is obsolete. Some brokers at the big firms complain that despite their firm’s purchasing power, they are still manually entering equity trades and toiling on front-office systems that are not even Windows-based.

Brokers at big firms often also have little flexibility in the face of executive decisions. ‘Last October, DS arbitrarily laid off a bunch of support staff, which has a big impact,’ says a DS broker from Ontario, ‘and they did it without consultation. Given the opportunity, I would have paid for them myself. It seems that [return on equity] is a higher priority in the short-run than long-term business building.’

That said, big firms can afford to have the latest, greatest systems. This is not always the case at small firms, and when it’s the compliance systems that go wanting, small firms tend to acquire questionable reputations. As one broker at a small firm states: ‘The culture here is every broker for himself, to hell with the client.’

But as these firms move into the void left by the shortage of independent alternatives, brokers say their images are changing. ‘There are better educated people in the business than 10 years ago. They are more professional, the exams and courses are harder, so the requirements are more stringent. There’s not too many cowboys left,’ says a Canaccord broker.

Even the cleanest of small-firm brokers will put up with the unflattering reputation because they treasure their freedom. One Canaccord broker expresses his contempt for the big firms: ‘I don’t want, every day, to be read the riot act.’ Another pledges: ‘I wouldn’t work at a bank-owned firm. It’s a question of autonomy. The guys at bank-owned firms are forced to sell things.’

There is no question there is tension between corporate finance and the retail side of the business and that tension is more intense at the bigger firms which dominate Canada’s underwriting business. Not only do the big firms do a hefty underwriting business, they are also more likely to launch in-house products such as new wrap programs or wealth management programs that tie the client to the firm, not the broker. Independent-minded brokers don’t like selling proprietary product. One happy Goepel broker applauds his firm for ‘the freedom to pursue our own goals and aims without pressure to follow corporate strategy.

In our survey, three firms tied for top marks in freedom from pressure. Two of them – Edward Jones and Goepel McDermid Securities Ltd. – are smaller independents. The third is Wood Gundy, a smaller bank-owned firm. The firm with the lowest score was Merrill Lynch Canada Inc.