Membership num–bers are down at the Toronto-based Mutual Fund Dealers Association of Canada, provoking growing concern about what is happening to smaller mutual fund dealers.

Some are linking up with other dealers — in the 12-month period ended June 30, 2007, nine firms merged with larger ones — often retaining office locations and staff but becoming branches of the larger firms. The fate of others is unclear. As a result, some industry players are asking whether growing costs may be squashing smaller dealers.

“There are about 50 fewer members than in 2002,” says Mark Kent, president and CEO of Calgary-based Portfolio Strategies Corp. “The MFDA says it reflects consolidation in the industry. But this is not necessarily a good thing. These small guys are selling out to the larger firms. Some are just not able to survive.”

While the number of approved persons has stayed consistent over the past three years at 75,000, the total number of member firms has dropped to 162 in 2007 from 220 in 2002. Costs of compliance, increased financial reporting requirements, policy and procedure manual rewrites, fees and assessments imposed by the MFDA’s Investor Protection Corp. have become more onerous, says Kent, and a lot of the smaller firms are beginning to think it just isn’t worth it.

“Part of the challenge is that [being in business] is always a moving target,” he says, “in the sense that the rules are constantly changing.”

About five years ago, the MFDA required dealers to produce policy and procedure manuals. Some dealers had never been in contact with a supervisory body before and had to create policy and procedures for the first time. To make the transition easier, the MFDA allowed firms to produce the manuals without set guidelines.

“It ended up being a debate in which some firms didn’t want a format that was set in stone, and others wanted a template,” says Larry Waite, CEO and president of the MFDA. “So, it really ended up being a 50/50 split.”

For Kent, it resulted in having to rewrite sections of the manual three separate times over the past five years. “When you start rewriting components every other year, eventually you just have to start from scratch and rewrite the whole thing,” says Kent. “That results in added costs for us.”

In addition, the MFDA requests monthly financial reporting. For firms that were previously providing quarterly reports to regulators, this has left them feeling frustrated about the increased time commitment and added costs. “Why do we need to provide monthly statements to the MFDA, when none of our regulators needed them before?” asks Kent. “The MFDA is supposed to be taking its marching orders from the securities commissions, and if not one of the securities commissions thought monthly financial reporting was important, why is the MFDA requiring it?”

This past spring, the MFDA decided to ask its members what they thought of the rules by distributing a membership survey. One of the main issues that came out was the monthly financial reports. “Monthly reporting is something that I hear about a lot and there are some firms who find the reporting to be burdensome, especially when it comes to timing, because it restricts them from going away around the monthend,” says Waite. “We are listening to all the feedback and seriously looking into it for some of the dealers.”

But some firms see the monthly reports as an added benefit to their business plan. George Aguiar, president and CEO of Toronto-based GP Wealth Management Corp. , says that as a business owner, the monthly reporting helps him keep an eye on the pulse of his firm’s financials. “Doing them quarterly, to me, would just further disconnect me from the day-to-day financial condition of my firm,” says Aguiar. “Right now, it is a regulatory requirement. But as a business owner, it would behoove me to do that even if there was no MFDA.”

Oakville-based Canfin Magellan Investments Inc. has grown from being a small firm to a mid-sized firm that has more than 70 advisors. Manny DaSilva, president of Canfin, knows what the smaller firms are dealing with and, while he empathizes with them, he knows that a dealer needs to have the resources to survive in this industry. “There are a lot of small dealers I believe just don’t have the resources to be able to deal with the requirements,” says DaSilva. “They have to ask themselves: ‘Are these requirements really outlandish?’ If not, should those dealers still be dealers?”

@page_break@When Canfin started its dealership more than 10 years ago, it didn’t anticipate having to allocate resources to the areas to which it does now, says DaSilva: “But it is a different world today, with a lot more at stake. Risk management is a much more significant part of our business. No one likes paying for car insurance; but when you get into an accident, it comes in handy.”

Kent is concerned that some of the smaller firms might find it necessary to give up their mutual fund licences and sell only segregated funds. “Then they don’t have to pay the MFDA a cent or deal with know-your-client suitability, which would be a huge public-interest issue,” says Kent. “They are just going to fly under the radar.”

Calgary-based Pewter Financial Inc. is a more unconventional firm that has kept its business running for almost 25 years. With more than $100 million in assets under management and five financial advi-sors, Keith Odegard, Pewter’s chief financial officer, says firms really have only two choices to survive: “Get really big or change your format.”

Odegard used to have a office but later decided that in order to focus on being profitable, he could reduce overhead costs by operating his business out of his home.

Odegard feels that the industry is not going in the right direction and says his past experiences have left him believing that the regulations are targeted toward larger firms. “What regulators normally propose are initiatives with which it is very easy for larger firms to comply,” he says. “But for the smaller firms, it can become a real challenge.”

Mailing out clients’ statements and protection fund fees are added costs that, Odegard says, can really start to add up for the smaller dealers. Increasing the representation of smaller firms within the MFDA could be one solution. “For me, it’s not even about the costs; it’s about the long-term viability, in which the regulators have more of an even balance within them,” he says. “Someone has to look out for the little guy.”

Knowing that the overall number of advisors haven’t changed doesn’t reassure Kent. He says that if the statistics are right, then the problem could lie with rookies coming into the industry and advisors with 10 or 15 years experience giving up their licences.

“These qualified individuals are going to sell segregated funds and random products, which can become complex, and they are doing it without being registered at the commissions. If the clients are being serviced by undereducated individuals or those who don’t want to play by the KYC guidelines, that becomes a huge problem for the
client.” IE