Small firms fight for survival: IIAC

The financial industry took in $15.3 billion in 2012 versus $15.9 billion in 2006, says an IIAC review of investment firm revenues from 2006 to 2012.

“That’s less than a 4% decline, reflecting annual rates of revenue growth that have bounced modestly around these levels in the intervening years,” says IIAC president Ian Russell in an industry letter.

He adds, “One can say the industry, on average, has held up reasonably well [but] it’s important to look at the yawning gap between integrated and boutique firms.”

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IIAC did just that. And its findings reveal larger and bank-owned firms have outperformed, with revenues rising 5% over that period.

What’s more, the firms’ clients remained fairly active by focusing on fixed-income solutions and blue-chip equities.

Read: Risk appetites to rise, says Laurentian strategist, for more on how clients are gaining confidence

“Fee income at the integrated firms increased nearly two-thirds over the past five to six years as firms built up their discretionary portfolio business across the client base,” says Russell.

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In contrast, boutique firms struggled, with Russell saying overall profits shrunk by roughly one-third. They stood at $4 billion in 2012, which is down $1.7 billion from 2006- to-2007 levels.

“Much of the revenue decline occurred in the latest two years,” he adds, since many clients left small firms or were too cautious with their funds.

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Further, revenue at institutional boutiques “was sideswiped by the collapse in small- and mid-cap equity financing in public and private markets, [most] notably in 2011 and 2012.”

Russell also mentions the operating costs and regulatory costs at both types of firms have risen. At smaller firms, in particular, this has amounted to a 4% increase over the past six years.

Read: Mid-sized firms buckling under economic pressure

This is “well above annual inflation. The steady increase in regulatory compliance costs, in terms of resources and technology spending, is the major factor responsible for this escalation of operating costs at the boutique firms,” he notes.

And the regulatory burden won’t lighten over the next couple years, he adds. IIAC estimates 80 proposals have been created for both new and amended rules. They’ve been either announced, or are in the consultation or regulatory review phase.

Russell predicts the survival of boutique firms depends on uncontrollable factors like the direction of the economy and the development of regulatory reforms. Check out the letter here.

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