Boutique broker bust bears a few lessons
Crisis abated, but risk aversion is duly noted
• The crisis that wiped out a quarter of Canada’s independent brokers seems to have halted.
Four new firms signed up with the Investment Industry Regulatory Organization of Canada in the first five months of 2017 and only two deregistered. That compares with net dropouts over the past four years as plunging commodity prices and higher compliance costs favoured big banks.
Boutique dealers were also battered by Canadian investors’ post- crisis aversion to risk capital, which prompted them to avoid the kind of companies that typically work with smaller brokerages. Such firms funnel research and capital into small and mid- cap companies, which account for more than a quarter of volume traded in Canada’s equity markets.
“Life for independents has gotten better over the last six months,” Dan Daviau, chief executive officer of Toronto- based independent broker Canaccord Genuity Group Inc., said by phone. “Investors are all of a sudden saying, ‘ Hey, I don’t mind taking a little more risk, I don’t mind investing in an early- stage tech company or a mining company that’s just discovering stuff.’”
Canaccord survived the bust because two-thirds of its revenue came from outside Canada in the year through March 2017, though at $5.20 its share price is well below the peak of $13.40 in 2014.
Others weren’t as lucky. Fraser MacKenzie, Octagon Capital and Salman Partners shut down while consolidation saw Raymond James Financial Inc. b uyi ng MacDougall, MacDougall & MacTier Inc. and Echelon Wealth Partners Inc. acquiring Dundee Goodman Private Wealth.
The number of boutique dealers could fall to 100 from about 200 before the financial crisis, said Ian Russell, CEO of the Investment Industry Association of Canada.
“Over the last couple of years the number of firms throwing in the towel has dropped off quite a bit, but we keep a watchful eye because there might be 40 or 50 small firms that are still struggling,” Russell said. “If conditions slip or stay roughly the same over the next couple of years, we will see further shrinkage.”
A shortage of small brokers risks wiping out Canada’s small and mid- cap equity markets. Companies listed on the TSX Venture Exchange and Canadian Securities Exchange accounted for 25 per cent of volume traded in Canada’s equity markets in the 12 months through March 31.
The small- cap market — heavily weighted toward junior miners — struggled from 2011 to early 2016 as global commodity prices plunged. TSXV- listed companies raised just $ 3.3 billion of equity capital in 2015, down 66 per cent from 2010. Between its post- crisis high in early 2011 and its low in early 2016, the S& P/ TSX Venture Composite Index fell about 80 per cent.