Retail firm rebound sparks brokerage industry

(November 26, 2003) For the second straight quarter, Canada’s brokerage industry has posted healthy profits, the first time that’s happened since 2000. And there’s cautious optimism for the year ahead.

Industry operating profits totalled $877 million in the July-September period, a 5% increase from the previous three months, the IDA says in its latest securities industry performance report.

The return of retail investors to the equity markets helped fuel the profits. Integrated firms saw profits rising 10% to $662 million while retail firms made $57 million, more than doubling the previous quarter’s performance.

The sustained gain in earnings is a welcome development for an industry that has been battered over the past three years, says IDA senior vice-president Ian Russell.

“You’ve had difficult markets and that whole tech blow-off that destabilized a lot of investors,” Russell told Advisor.ca. “On top of that, you’ve had confidence shaken over things like accounting irregularities. So to see us weather this storm — almost the perfect storm in a way — and make a comeback is positive.”

The resilience of the small retail sector has been something of a surprise, Russell says, for a number of reasons. “They’ve gone though a very difficult period with almost no earnings for three years and they haven’t had the size to maintain competitive operating costs.”

In addition, Russell notes that the retail business has shifted to focus on more sophisticated structured products that offer higher yields, such as hedge funds and wrap accounts. “It’s been difficult for small firms to have access to the full range of those products.”

Still, the recent improvement in markets will not mitigate pressure on small firms to strengthen operating margins and profitability, the IDA says. That means consolidation in the retail sector will continue. “Cross-sector mergers, such as the recent Dundee Wealth acquisition of Cartier, will be typical of the restructuring that occurs in the industry,” the report states.

Securities industry commission revenues were up 11% to more than $1 billion in Q3 while firms dealing mostly with institutional clients saw profits fall slightly in the quarter, to $158 million.

The discount brokers also enjoyed higher profits, reporting a 26% increase in nine-month earnings compared to 2002.

Russell says there will always be a core group of investors who manage at least a part of their own portfolios and as markets improve, their trading takes off, which is reflected in the discount brokers’ earnings.

“That explains most of the increase,” he explains. “But what happened is that many people got into that game who never should have or got into it on a scale they never should have. Those people learned their lessons and now recognize the value of good advice.”

Brokers are feeling much better about the overall industry picture, says Russell. “There’s a rebound in investor confidence and good opportunities to come back into the market. That certainly has provided room for optimism.”

Looking ahead, Russell expects the industry to continue building on its recent gains, albeit at a more modest pace than in the boom years. “I don’t think anyone is looking for tremendously strong recovery in earnings or growth, but the fundamentals look pretty positive, so there’s a good chance we will see continued good business conditions in the next year.”

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