Smaller investment dealers hit by rising costs, dispirited markets

Depressed market conditions and rising operating costs could lead to an exodus of independent investment dealers over the coming year.

Small and mid-size dealers have been struggling in recent years, with more than 50 of them vanishing since 2013, according to the Investment Industry Association of Canada. Some merged with rivals or were swallowed up by other firms, while others simply shut their doors, IIAC president and chief executive Ian Russell said in a letter published earlier this week.

Mr. Russell predicts that there could be more firms exiting the industry this year than there were in 2018, when 11 dealers effectively vanished.

“This year we’ve got a double-edged sword of slower .... revenue growth and continued escalating costs from technology [spending] and regulatory compliance, squeezing profits,” Mr. Russell said in an interview Thursday.

“For smaller firms who don’t have the benefit of scale and rely on more niche markets, they’re going to feel the pressure.”

Both retail firms and those servicing institutional clients are likely to feel the pinch.

On the retail side, commissions tend to dwindle during times of market volatility, as investors typically become reluctant to trade. And fee revenues – which are charged as a proportion of an overall portfolio – will suffer as well if the market declines.

Investment banking revenues are also likely to suffer, as market volatility often causes companies to delay their capital-raising plans. The resource sector, once the bread and butter of independent investment banks, has been hit particularly hard in recent months.

The rapidly expanding cannabis industry has helped to fill the gap, boosting the revenues of the independents. But financings by Canadian cannabis producers are expected to slow this year as the industry enters a period of consolidation.

The slowdown in revenue growth is particularly challenging against the backdrop of steadily rising operating costs.

“The compliance costs are astronomical,” Thomas Caldwell, chairman of boutique wealth manager Caldwell Financial Ltd., said in an interview Thursday. It’s tougher for smaller investment firms to absorb such expenses, compared with their larger rivals who benefit from scale, he noted.

Meanwhile, changing customer preferences are forcing firms to boost their technology budgets.

All of that spells trouble for Canada’s boutique investment dealers. And if firms close up shop, that ultimately means means less choice for investors, Mr. Caldwell said.

“The [bank-owned] firms fulfill a valid service, but increasingly the product range has to be geared to a mass market," Mr. Caldwell said. "Our guys can sell anything they want, as long as it’s a good product.”

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