What the Raymond James-3Macs deal says about the industry

“Finally.”

That was the first thought that came to mind when Daniel Thompson, vice-president of Lorne Steinberg Wealth Management in Montreal, heard that Raymond James acquired 3Macs. Thompson is former president of 3Macs.

“The independent space in the IIROC platform […] has been challenged for quite a few years now, in some cases severely. We’ve seen a lot of consolidation, we’ve seen shops literally closing their doors. I think 3Macs took several kicks at the can in terms of trying to develop a platform that would allow them to grow and stay independent—recruit new people, grow the assets, grow the advisor base and the client base, etc.—and I would guess […] that ultimately they weren’t successful in doing that.”

Thompson notes that over the past decade, and particularly post-crisis, the industry has faced intense pressure on margins and on the regulatory front. “In the old days, you could run a full-service IIROC-platform firm with one compliance person […]. That’s not the case anymore. Even [for] a relatively small firm like a 3Macs, because of their independent platform, because they traditionally have given investment advisors and portfolio managers latitude to invest in pretty well whatever they wanted to invest in, it’s an expensive platform to maintain, and the margins just aren’t there anymore.”

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Randy Ambrosie, president and CEO of 3Macs, told Advisor.ca last week that regulatory pressures were indeed part of the decision to seek an industry partner. “In the background, behind it all, is: ours is an industry in the midst of change, and some would say maybe not even an evolution, but maybe perhaps even a revolution. Certainly regulatory changes [are] an impetus to that.”

But it doesn’t stop there, says Thompson. “You have an aging and risk-averse population—all the demographics are against you. […] So it’s pretty well inevitable that all the independents have to pay the piper at some point in time or face the impending doom that their business model doesn’t work anymore. It’s not profitable [and] it’s not competitive.”

Raymond James has had its eye on 3Macs for years, says Paul Allison, chairman and CEO at Raymond James Ltd. It approached 3Macs about a decade ago to express interest in a potential deal; when Allison joined Raymond James about eight years ago, he “kept the dialogue going,” and suggests this ongoing contact may have been one of the factors that ultimately led 3Macs to choose Raymond James.

And that’s how both parties are framing it: 3Macs chose Raymond James, the implication being 3Macs had its pick of suitors.

Allison adds it’s Raymond James’ intention to keep all of 3Macs’ advisors, and says he sees the 3Macs division as an area for growth.

Times are a changin’

Thompson says the changing face of the advice business is driven by the dominant players: the banks.

“I think the banks are trying to get away from the high-cost-to-the-client, high-payout-to-the-advisor/portfolio manager, traditional full-service business. They are pushing that business, they’re buying books of business, they’re retiring books of business, and they’re merging books of business, but they’re definitely pushing these advisors/portfolio managers and ultimately their clients into the managed product space—wrap accounts, mutual funds, ETFs, robo-advisors.”

For the most part, says Thompson, the next generation of advisors is not being trained as wealth or portfolio managers “with an independent pattern of thinking.” Instead, “You’re training them to be product peddlers, and you can pay a product peddler $50,000 a year and maybe bonus him $10,000 or $20,000 for good performance. You don’t have to pay a product peddler a 50% payout on a $300 million book.”

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So, to the extent there is a shift from commission-based compensation to fee-only, Thompson thinks the trend will be for these advisors to be pushed into offering mostly managed products.

The banks “would be very happy if every single one of the bank and bank-owned brokerage clients was […] paying 1%” for a “middle-of-the-road, relatively conservative balanced-type product in a wrap account or mutual fund or family of ETFs that de-risks the client experience and results in [the bank] paying a heck of a lot lower level of payout to the advisor,” Thompson speculates. “Even the most successful, discretionary fee-based managers working under a bank platform in Canada—the banks would like to get all those people more or less in line, too.”

Why?

“We live in an era where, if the TSX goes up 10% and your portfolio goes down by 10% because you overweighted oil and gas or underweighted whatever, you can get sued successfully. […] History has told us the regulator will look at that and go, ‘Well, you really should have put your client in […] a broad-based index-like portfolio, and you didn’t, so tough luck.’ ”