Small investment dealers hold inherent weaknesses, says IIAC president

There could be widespread restructuring of small investment dealers within the industry over the next year because of an inherent weakness among some of these firms in their long-term competitiveness, says the president of the Investment Industry Association of Canada (IIAC).

In a newsletter, Ian Russell says the investment industry in general is competitive, robust and resilient and is well-positioned to meet retail and corporate client demand despite market turbulence.

Smaller firms have been resilient in the past

But not the same can be said for the 150-or-so smaller firms, says Russell. In the past five years, he says, smaller firms have done well focusing on niche markets and broadening their corporate and institutional businesses and have been resilient in competing in difficult business conditions.

But the smaller dealers also face major obstacles when it comes to building scale, including minimal capital or access to capital to finance acquisitions or on-board advisors from existing firms.

The overall return on equity for the retail independents as a whole averaged an uncompetitive 10 per cent, compared to five per cent for institutional firms. The small core group of the large full-service and national firms, the integrated firms, have outperformed by a wide margin, with nearly double the return of smaller dealers and an average return on equity of about 15 percent. The outlook for operating returns is not particularly positive.

Capital constraints will hinder smaller firms

“Limited capacity for business scale for small firms will constrain financial product and service offerings for wealth markets and limit scope for competitive fee cuts, while capital constraints will hinder their ability to adapt new technology to improve client interface and enhance operational efficiencies to compete for retail investors,” writes Russell.

Mergers and acquisitions will take place over the next year among the small investment firms, predicts Russell. But in the end, the industry will consolidate to larger independent dealers resulting in a more vigorous and competitive industry.