Brad Pitt stars in the Columbia Pictures movie Moneyball.
The business of stock brokerage in Canada is starting to look a lot like Major League Baseball, which is no fun if you are running a small-market team.
As a whole, the industry of selling shares, bonds and mutual funds to individuals in Canada is not making money. For the first half of the year, retail brokerage firms as a group were in the red, according to the industry association, an unprecedented turn of events. A business that had successfully endured down times before is drooping under the weight of a lack of trading, low interest rates and increasing costs for players – the brokers – and regulatory burdens.
The big banks play the role of large-market teams like the New York Yankees. Free agent brokers are getting offers from spendthrift owners that some in the industry say require 10 years of high performance to become economical – the wealth management equivalent of signing Albert Pujols and assuming he will keep hitting at an All-Star pace. Small-market teams can't, or won't, compete.
The result is that there are fewer and fewer competitive small-market teams. In that environment, speculation in the industry is now turning to the fate of one of the last major independents, Richardson GMP. The business is a partnership between GMP Capital, which owns roughly a third, and Winnipeg's billionaire Richardson family. Brokers who work at the firm also own a portion.
Richardson GMP has built a relatively big business in a short period of time. It has about $14-billion of assets and 150 advisers. It gets high marks from clients in surveys.
However, like many rivals, the firm is not making money in the current environment. The firm's revenue fell 10 per cent in the first six months of this year, relative to the first six months of 2011. The result was a loss of $1.27-million in that period, compared to a profit of $6.1-million in the first half of 2011. Growth in assets and the broker force is stagnant.
With backers like the Richardsons, the firm has more financial firepower to weather a slow period than most independents. But Richardson GMP's struggles to become consistently profitable, and the cost of luring brokers to keep growth rolling, keep fuelling expectations that the parties will choose to take a big cheque from a bank and move on.
Harris Fricker, GMP Capital's chief executive officer, said in an interview Monday that he is "completely focused" on working with the brokers and the Richardson famity to build the business, which he calls a "highly coveted" asset.
What could prompt a sale process is an agreement struck by the partners that calls for GMP to bid for the whole of Richardson GMP in two years. In November, 2014, GMP and Richardson must "negotiate for an acquisition by GMP" of the rest of Richardson GMP, according to regulatory filings. If the parties can't reach a negotiated deal, "GMP will deliver an offer." If Richardson passes on the offer, the whole process repeats again in a year. However, if the Richardson side accepts, it then has the option to sell to another bidder that is willing to pay more.
National Bank of Canada, which has snapped up the last two major brokerage businesses to come on the market, and Bank of Nova Scotia, which is viewed as underrepresented in the retail game, are viewed as likely suitors should the firm come on the market.
Do the banks make money providing retail wealth management services when they pay up for firms and individual brokers? It's hard to say exactly. Because like a big-market sports team, much of the money is in the ancillary business. If you own a profitable cable network that needs content and ratings, then plowing cash into a baseball franchise and star players makes more sense.
Banks can sell loans and other services to good wealth management clients. Also, bank-owned investment banking firms are increasingly relying on retail investors to create the demand for corporate stock sales such as initial public offerings, on which the banks earn fees. These days, as much as 80 per cent of all new stock in Canada is sold to retail investors, according to some bankers who do such deals. A few years ago, that number would have been closer to 60 per cent.
For an investor who needs a broker, the result of all this is a steady diminution of competition in an industry already dominated by banks. And if the main reason a bank can pay more to own wealth management is because they can cross-sell other products, such as initial public offerings or wrapped mutual fund accounts, that's not necessarily in the best interests of the person looking for advice on where to put their money.