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Costs forcing smaller financial dealers into arms of larger rivals

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Increased costs and regulatory pressures are driving more consolidation in the financial services industry, with a number of smaller dealer firms being forced to either exit the industry or merge with larger forces to survive.

As a result of continued weak capital markets activity and low interest rates, and increased regulatory compliance costs, the industry could see further consolidation among small investment firms, says Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC).

Much of the rise in regulatory costs is from the implementation of the second phase of the Client Relationship Model, a new regulatory regime that will require financial advisers to disclose all fees and costs associated with products and services. The next segment of CRM2 will be implemented at the end at 2015.

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"When you look at the industry over the last 20 years, there have been periods of ups and downs, but in the last two years we have seen, by far, the largest withdrawal of [Investment Industry Regulatory Organization of Canada] (IIROC) firms from the industry," Mr. Russell says. (IIROC is the national regulator overseeing investment dealers)

The impact of increased regulatory and compliance costs is not only affecting the securities industry, but also mutual fund dealers and managing general agencies within the insurance industry.

In early February, Investment Planning Counsel Inc., a large independent wealth-management firm owned by IGM Financial (a member of the Power Financial group), acquired yourCFO, a smaller Burlington, Ont.-based securities firm with $750-million in assets under management.

IPC, which has $24-billion in assets under administration, also picked up mutual fund dealers Independent Planning Group Inc. and GIC Financial Services Inc.

Doug Leyland, former president of yourCFO, says increasing compliance costs and stiff competition from the banks eventually led him to join forces with IPC.

"Bank- and insurance-owned dealers have the resources to provide both high payouts and recruitment bonuses to advisers," Mr. Leyland says. "They can run the dealer at break-even because they know their advisers will sell their proprietary products to their clients and that's where the serious money is made. I ran a truly independent dealer in that my firm did not manufacture its own investment products. Those days are done."

IIROC membership has been declining over the years. Membership stood at 187 members as of Dec. 31, 2014. That's down from 195 members just nine months ago.

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In a statement, Paul Riccardi, IIROC's senior vice-president of member regulation, says the organization is committed to maintaining a competitive landscape for the delivery of investment services to Canadian consumers from a scale, scope and geographical diversity perspective.

"There have been a number of contributing factors including the economic environment and market conditions that have made it more difficult for some firms to compete," Mr. Riccardi says. " We believe that the public interest is best served by a diverse group of IIROC members that vary in size and business models, ranging from the largest financial institutions to small businesses with 10 or fewer staff."

Similar declines are occurring at the Mutual Funds Dealers Association (MFDA), the regulatory body who oversees mutual fund firms. Membership has fallen from 220 members in 1998 to 108 today and that number is set to drop again.

Last month, Investia Financial Services Inc., a wholly owned subsidiary of Industrial Alliance and Financial Services Inc., acquired Tenstar Financial Group's mutual fund, segregated fund and life insurance distribution businesses.

The MFDA was not available for comment.

"You are taking away a choice in competitive options for individual investors," Mr. Russell says. "The smaller firms add a dimension. They are more specialized and add to the competitive fabric of the retail wealth management business. To see them disappearing is not a positive thing for Canadian markets."

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Mr. Russell says that many of these firms are smaller retail and institutional firms that have been under stress over the past five years. Difficult market conditions and intense competition have pressured smaller boutique firms to reconsider business models.

"The upshot is that, at some point, unless conditions improve, firms start to look to restructure. They either look to exit the business or merge with someone else," says Mr. Russell.

In September, 2014, MonArc Money Solutions Inc. decided to exit the industry and resigned its membership in the MFDA.

Consolidation has also started to creep into the insurance world, with smaller managing general agencies no longer running independent shops.

Peak Financial Group acquired HBO Financial Services, a Montreal-based MGA, to join its insurance arm-Peak Insurance Services. HBO was home to 40 independent insurance advisers.

HUB Financial, the largest MGA in Canada, has scooped up several MGAs over the past year, including Daystar Financial, MGA partners and mutual fund dealer Interglobe Financial services.

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