The strong are getting stronger in Canada's investment industry as the benefits of rebounding markets flow increasingly to the largest firms.
The result is that firms that are left behind will continue to vanish.
Projections from the Investment Industry Association of Canada (IIAC) show that profits are on the rise across the brokerage and securities industry. But it is very much a business of haves and have-nots.
The expectation is that the biggest firms (such as the bank-owned investment dealers) will see profit rise 27 per cent, putting them above pre-crash levels. The 150 or so smaller firms are seeing profit increases, but not to such extremes. And within that group of smaller firms, many are struggling. There are about sixty that are still losing money or just breaking even.
IIAC head Ian Russell suggested that as many as 30 to 40 smaller firms could disappear through closing and mergers in the next year or two.
"The stronger, larger boutiques are doing very well and have capitalized on the improving market conditions, but we still have a large number of small niche-oriented boutiques that are struggling," Mr. Russell said. "They are the vulnerable part of the group."
He said that while 30 may sound like a lot, "that's not that aggressive of a projection. In the past two years we've lost 22 boutiques."
Big firms have the resources to offer wider product lines and they are using that to draw in customers. They also have the scale to handle the increased cost of more and more regulation.
The result will be a more concentrated business. Notably, while the number of firms is falling steadily, employment in the securities business is remaining relatively steady. Similarly, the remaining firms are able to bring in more revenue per employee.
"The better boutiques will get bigger and they are also getting better. We'll have a stronger boutique sector but a smaller one."
Many smaller firms are looking for merger partners. Rarely a day goes by without a rumour that two smaller firms are looking to get together. But the ratio of deals to rumours is low, reflecting the fact that such transactions are tough to consummate. Between egos, histories and complicated partnership structures, it is often very difficult to put together two firms.
"What happens is they will simply close the doors in many cases, and the good people will just go elsewhere," Mr. Russell said.
A turnaround in the markets that matter for smaller dealers – mining stocks mainly – will not be enough. There down cycle for miners is hurting smaller brokers. But the fact is that many are simply too small to manage in a higher-cost business where the competition is increasingly much bigger.
"Even if markets improve, it's still going to be tough," Mr. Russell said.