INDEPENDENT BROKERS SQUEEZED

INDEPENDENT BROKERS SQUEEZED

Published by Patrick Moore on November 19, 2013

Canada’s securities industry is shrinking.  Consolidation – as a result of over-regulation and escalating operating costs, is especially squeezing small dealerships as their margins are tighter. That means fewer choices for Canadian investors and entrepreneurs seeking capital.

As of 2012, operating cost per dollar value has sky rocketed to 61 per cent for independent brokerages as opposed to 18 per cent for integrated firms. And small firms that generate most of their revenue from advising retail investors collectively lost $99 million last year. Investment Industry Association of Canada (IIAC) estimates suggest about 30 small-and mid-sized dealers have disappeared over the last four years since the financial crisis. (see chart)

In a recent interview with Canadian Investor Magazine, Mark Redcliffe, CEO of Vancouver based Jordan Capital said that it is difficult for independent brokerages to cope.  “Seventy-four new rules have come down so far in 2013, compared to 30 in 2007.”

But he was quick to point out that added regulations are not the only problem, although they exacerbate the situation.

Mark Redcliffe
CEO Jordan Capital

He also notes a global economic slowdown, financial scandals, problems resulting from High Frequency Trading, retail investors who are spooked by the marketplace, and increased costs. With the myriad of trading options, brokers need to make massive investments in technology to continue to keep pace. One solution, in his opinion would be to streamline the regulatory process, “We believe a national regulator rather than the current multi-jurisdictional approach would be more efficient.”

Some investors are moving a portion of their portfolio to Exempt Market Products (EMPs) with Exempt Market Dealers (EMD) for an alternative investment to add to their holdings.  Another growing alternative is Crowdfunding, a small but growing phenomenon which muster a money raising strategy through social media to round up relatively small contributions from the crowd of supporters and interested observers. Mr. Redcliffe waves a cautionary flag at these trends.  “Broker firms have a duty of care to our clients to act in their best interests and meet their Know Your Client and Investment Objectives,” he says.

However, despite difficult market conditions and widespread industry challenges ongoing since 2008, Vancouver-based, Jordan Capital Markets Inc.,  is growing while most other independent dealerships are not. They set-up shop in 2008 – in the midst of the financial downturn – and have since grown from eight to more than 50 employees. They are one of only three new investment dealers in B.C. in the last 13 years.  Although based in Vancouver the have swung away from the junior exploration and mining companies into cash flowing companies (like waste-water management) still in the resource sector. They recently opened a Calgary office which has produced significant success for its client base by adding a focus on Bio-Tech to supplement the usual oil and gas offerings.  In January this year Jordan Capital  partnered with Asesorias e Inversiones(Colombia’s oldest brokerage firm) brokerage firm to provide their clients with access to one of South America’s fastest growing markets and capitalize on its unique high quality opportunities.  “Canada and US have just become so expensive for resource development. Colombia is really on the rise”, says Mr. Redcliffe.  They have recently also partnered with CP Capital Securities in the U.S.

In addition to growing Jordan Capital, Mr. Redcliffe, (a former regulator) is participating in an effort to build a consortium to push for proportionate and fair regulation. Mr. Redcliffe is one of the 18 members on Pacific District Council for the Investment Industry Regulatory Organization of Canada (IIROC) to raise and discuss relevant matters and provide input on policy initiatives.  “We want to work with the regulators to try to establish a level playing field for all firms,” he says.

As a result of Jordan Capital’s advocacy efforts, changes were recently made to issuer roll-back rules published by the TSXV. In addition, the company’s efforts also helped pave the way for the announcement by the exchanges of a non-shareholder approved exemption. This gives all shareholders, not just a select few, the right to participate in the upcoming rights issue that would follow after a reverse stock split – in essence, creating that much vaunted “level playing field”.

Overregulation is just one problem among many facing Canada’s securities industry but the continued loss of independent brokerage firms that have typically built substantial managerial expertise and operations infrastructure to advise retail and institutional investors will be a blow to investors, regional economies and venture markets.

Published by Patrick Moore on November 19, 2013

About Patrick Moore

Canadian Investor Magazine Editor, Patrick (Paddy) Moore is a multi-media journalist who specializes in business and industry, based in Vancouver, but with a global perspective. Formerly a producer with CBC News and Current Affairs, he is also a frequent contributor to Resource World Magazine and Creative Director of BTV: Business Television on BNN.

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