Boutique brokerages are successfully wooing experienced investment advisors away from their bank-owned rivals by offering equity in their firms and higher payouts, a new study by Toronto-based Investor Economics Inc. shows.

The three largest bank-owned investment dealers in the country — RBC Dominion Securities Inc., BMO Nesbitt Burns Inc. and CIBC Wood Gundy — each lost 1%, or a total of about 40 brokers, in the three months ended June 30, says the research firm’s Summer 2005 Retail Brokerage Report.

The fourth- through sixth-ranked firms — ScotiaMcLeod, TD Waterhouse Private
Investment Advice and National Bank Financial Ltd. — meanwhile, gained 0.6% more brokers, while “other” firms — the boutiques — picked up 10.6%.

The smaller firms see attracting experienced brokers with substantial books as the most cost-efficient way to build their asset bases, says Jamie Sutherland, senior analyst at
Investor Economics. “From what we hear, you do that by offering a more competitive compensation structure — and some of them have been offering equity in the firm.
That’s attractive to brokers,” he says.

The study of 71 firms looked at 9,102 brokers in Canada, including 3,933 at the top three firms, 1,998 at the next trio and 3,171 at the remainder. Year-over-year, the number of brokers grew by almost 3%, which is a continuation of a trend throughout the broker market in Canada. The count at top-tier DS, Nesbitt and Wood Gundy, however, dropped by a combined 3%, from 4,055 as of June 30, 2004.

Yet the number of advisors at boutiques, which had 2,901 advisors in June 2004, is up 9.3% on a year-over-year basis.

The second tier of bank-owned firms, meanwhile, are up a combined 3.4% from 1,933 advisors over the same 12-month period.

The number of defections to smaller firms from their bank-owned competitors would have been considerably less three or four years ago, simply because there were considerably fewer boutiques in the marketplace, says Dan Richards, president of Strategic Imperatives Ltd. , a Toronto-based consulting company to the financial services industry.

Since then, companies such as Wellington West Capital Inc., Richardson Partners Financial Ltd., Canaccord Capital Inc. and Rockwater Capital Corp. have either arrived on the scene or come of age.

“On top of that, Assante Corp. and Dundee [Securities Corp.] are more aggressively going after brokers, as well. Now there are all kinds of interesting alternatives that weren’t there previously,” Richards adds.

The challenge for advisors who believe smaller is better is persuading clients to join them in their leap of faith. And that is a significantly more difficult proposition than it was only a few years ago, Richards maintains.

“As long as you stay where you are, you have momentum working in your favour,” Richards says. “Your clients are already there, they don’t have to do anything to stay there. As soon as you leave, you have inertia working against you. Clients have to go through new forms and statements. It’s work.”

Much of the boutiques’ success comes from contracting out their back-office functions, says Ian Russell, senior vice president of industry relations and representation at the Investment Dealers Association of Canada in Toronto.

Boutiques can compete

In addition to Web sites, account statements and clearing and settlement processes, carriers such as the NBCN tend to provide a wide range of sophisticated investment products for the small firms.

“Because of that platform, the boutiques are in a position to compete effectively with the banks to attract brokers and clients,” says Russell. “The two often come together because of strong broker/ client relationships. The client wants a full array of products, and the brokers need [NBCN-style] services.”

Although the smaller firms have attracted a significant number of experienced advisors, as well as assets, revenue and earnings, since the markets turned around in 2003, Russell isn’t optimistic the winds of change will keep blowing.

Costs start to escalate for smaller investment dealers when they have to pay bonuses, salaries for assistants and higher payout ratios — terms and conditions that must be put on the table when looking to attract high-performing brokers, he says.

“The brokers that wanted to go [to the boutiques], many of them have already gone. I think it’s a hard sell and it will act as a constraint on small firms’ growth,” Russell says.
He notes that compensation and payouts in the industry went up 29% from 2003 to 2004, while total operating expenses rose 18% in the same time frame. Operating profit of independent firms was about $300 million at the end of the first quarter of 2005.

@page_break@But it’s not as though boutiques have their hands tied, Russell says, because they can still nurture and develop new brokers. “It’s a longer-term and slower process, but I think that will increasingly be the way smaller firms grow,” he says.

The bank-owned firms, of course, have hardly been sitting idly by. Richards says they have adopted two strategies to minimize the damage: they’ve become much tougher in going after the clients of brokers who leave, and they’ve become much more aggressive recruiters themselves.

The bank-owned dealers can also take comfort in the fact there is a certain segment of clients, particularly older ones, who are more comfortable being part of an established organization, he says.

Dave Pickett, senior vice president of practice management at TD Waterhouse in Toronto, says his firm is one of two top-six firms to see growth in its broker channel recently.

“We’re up around 15% or 20%,” he says. “We’re aggressive; we don’t have the same size that the three biggest have. They’re in the 1,300 to 1,400 broker territory; we’re at 480.”

TD Waterhouse isn’t offering company stock or higher payouts as an incentive to jump ship, but nothing prevents a broker from taking his or her transition package and buying TD Bank Financial Group stock, he says, adding shares give the banks a competitive advantage.

“When you’re a publicly traded company, the equity is where it always is. When you’re a boutique, there’s that unknown factor,” he says. “What will that equity be worth six or seven years down the road? What will the strength of the firm be, and will there be buyers [for the shares]?

“The value proposition is pretty back-end loaded,” he adds. IE