IDA conference update: Small dealers survived, now thriving

(June 17, 2004) Ian Russell admits he thought consolidation among Canada’s smaller brokerages was inevitable, particularly when the market bottomed out in 2002. Not only have those small firms managed to survive, but they’re now thriving as stocks rebound and the economy strengthens, says the IDA’s senior vice-president.

Russell presented his annual state of the brokerage industry report earlier this week at the IDA’s annual conference in Mont Tremblant, Quebec.

“A lot of people anticipated the demise of small firms, but as the saying goes, the rumours of their deaths were greatly exaggerated,” he said. “As the markets improved, these firms which tended to have fairly high leverage managed to benefit enormously when volumes picked up.”

Canada’s investment firms made a profit of $1.2 billion in the first quarter of 2004, a 21% rise from the same period last year. “We have literally caught the wave of the capital markets and the economy,” says Russell. “Our profits have increased incredibly over the past year after bottoming out in 2001 and 2002.”

Not only did the small firms survive, they have also increased their market share over the last three years, to 35% from 30%. “That’s a very heartening development and shows that in a complex market, small firms have been able to compete very effectively,” says Russell.

The growth trend among smaller firms runs against conventional wisdom that scale means everything, Russell concedes. But he notes that technology has provided a counterweight for the independents, enabling them to take advantage of third-party providers for services such as statements, record-keeping and the clearing and settling process.

In addition, those firms can access sophisticated products from third-party providers. “So the small firms don’t have those disadvantages of scale or access to product. They do have the advantages of being nimble, regional and entrepreneurial. That’s why, looking ahead over the next year or two, that industry is going to thrive.”

Thirty-nine new firms joined the IDA in the past two years. Of those, almost all were retail, Russell said, and 18 had capital of less than $5 million. The larger start-ups have come mostly from the non-IDA world, as established firms look to broaden their scope of products and services.

Still, there has been some dealer consolidation over the past couple of years. “Wellington West moved a number of small firms together in a rather innovative way,” says Russell. “Union Securities has moved into a more national operation, again through some consolidation, and First Associates has also managed to consolidate.”

On the employment side, the overall IDA numbers have been flat over the past few years. If you dig deeper, you’ll also find data favouring the small firms. Russell pointed out that the integrated bank-owned firms shed 5,000 jobs in the last few years. Over the same period, there was a 20% employment increase in the retail sector. “And that’s happening at a time when those firms were struggling. Some of those employees have come from the integrated firms but some have come from the non-IDA world.”

“It’s all part of a trend to be delivering sophisticated products and services to your clients and the convergence of financial services, such as insurance, estate and tax planning, and traditional financial advice,” says Russell.

Investor Economics president Earl Bederman has also noticed the shift to the IDA model among advisors. “The IDA platform will emerge as the platform of choice,” Bederman said in a presentation at the same Quebec conference. “Being product-centric is not sustainable.”

Despite the success of the smaller firms, it’s important to remember that the bank-owned dealers remain strong, says Russell. “The integrated firms have done very well over the past year, partly because of their competitive advantages, their national presence, their size, sophistication, ability to cross-sell products and reputation.”

“People tend to forget there are strong advantages for the retail broker in that environment, such as access to in-house research and sophisticated proprietary products. Small firms have positioned themselves well but integrated firms remain formidable competitors.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com