Brokers get green light to set up independent shops

(May 21, 2003) A long-awaited rule change allowing independent agents in the securities industry is now in effect. The principal-agent bylaw permits IDA member firms and their representatives to enter into non-employee-employer relationships, similar to the mutual fund and insurance industries. Under the old rules, brokers had to be employees of their firms.

Peter Bailey, formerly with the IDA and now a senior vice-president with Raymond James, has been lobbying for this change for three years. He says it levels the playing field, allowing independence in the brokerage world.

“You can own your own book and run your own business,” Bailey told Advisor.ca. “If you’re more entrepreneurially-minded, it gives you a little more freedom,” Bailey told Advisor.ca. “You can also control your own expenses. It’s amazing how much less you need if you’re paying out of your own pocket.”

Under the Raymond James system, the firm provides an 85% payout to its contractors and charges $25 a trade. The agent is responsible for all expenses. So far, Bailey says, two Raymond James employees in Western Canada have switched to the agent model, moving out of the branch and setting up their own shop.

The new rules could attract agents in the financial planning and mutual fund industry who are trying to get into securities, Bailey points out.

“In the old days, you could send your clients to a dealer to do the equities portion of the portfolio,” he explains. “Now all those dealers are also planners, so you have a chance of losing your clients.”

But Bailey doesn’t expect the brokerage industry to change overnight. “Firms have the choice and I think for some period of time the employee model will prevail,” he says. “Because you can’t just take your current sales force and say everyone is an agent.”

“There’s no question there are thinner revenues [for firms] at the end of the day,” he adds. “And agents own their own book, which is going to be a big issue for a number of dealers.”

The agency model has been successful in the U.S., Bailey notes, especially at Raymond James, with 75% of its more than 5,000 brokers registered as independent contractors.

In Canada, Bailey expects the model to take root in smaller cities and rural areas. “A lot of branches are having difficulty staying open with the decrease in volume,” he says. “But an independent contractor model can be done a lot more economically than a major branch that we would operate.”

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From a client perspective, the rule change will have no impact. “They have the same protection. It’s seamless and doesn’t matter whether you have employees or agents,” Bailey says. “Compliance makes it the same.”

The Ontario Securities Commission (OSC) approved the principal-agent bylaw earlier this month. Saskatchewan is also on board, as is Alberta and British Columbia. The OSC has asked the IDA to monitor any compliance issues arising from the principal-agent relationship and report back to regulators in one year.

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What does this decision mean to you and your industry? Do you agree with Bailey’s predictions? Is this good or bad for the industry? Share your thoughts or ideas with your fellow advisors in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(05/21/03)

Doug Watt