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Boutique investment dealers under siege

By Andrew Rickard | January 20 2016 11:39AM

Nine investment dealers withdrew from the Investment Industry Regulatory Organization of Canada (IIROC) last year. Their departures were due to mergers, closures, or a decision to switch over to exempt dealer status where the regulatory burden is less.

In his most recent letter to members, Investment Industry Association of Canada (IIAC) president Ian Russell suggested that boutique investment firms are “under siege”. He notes that difficult economic conditions and a "remorseless squeeze in operating margins" have already pushed several retail firms to the exits. He puts some of the blame on the new Client Relationship Model (CRM), which spawned new regulatory obligations that smaller firms do not have the resources to meet.

"Technology costs have also escalated to meet compliance requirements and streamline operations," he writes. "In the wake of these developments, and signs the rulemaking will not let up, it is not surprising that one third of CEOs of investment dealer firms in a recent IIAC survey expect industry consolidation to intensify in the next two years."

Russell is not sanguine about the prospects of the remaining small investment firms; he says dealers with gross revenues below $10 million may lack the business scale to absorb these continually rising costs and could eventually "succumb".

What can be done to improve the situation? The IIAC president believes the government needs take steps to revitalize the TSX Venture Exchange (TSXV) before it "collapses into insignificance", specifically by stimulating the market by introducing tax incentives such as those offered under the British Enterprise Investment Scheme, which offers a 30% personal income tax credit to those who buy shares in new and emerging business. The government could also bring more people into the venture capital market by allowing them to defer taxes on capital gains when proceeds of the investment sold is reinvested in the listed shares of a small business.

"It should be recognized that recovery of the TSXV will be slow, but those boutique dealers with a strategic vision, efficient operations and a diversified investment banking and trading business will benefit," concludes Russell.

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