Vancouver-based Salman Partners’ plan to cease its investment banking and wealth-management operations as of February 15 is another nail in the coffin for Canada’s independent brokerage sector.
CEO Terry Salman told Business in Vancouver February 10 that the company will continue to offer corporate advice for activities such as mergers and acquisitions and that he will keep about four employees.
All public clients have been moved to other brokerages, however, and Salman expects the Investment Industry Regulatory Organization of Canada, which regulates the industry, to approve the company’s voluntary resignation as a brokerage by June.
“We’re not winding down the company,” Salman said, correcting what had been a widespread misconception. “I have 40 years in this business. I’m not about to throw away my Rolodex.”
Salman Partners once employed 60 staff and had 40 employees as recently as December.
During its 22 years in business, Salman raised more than $20 billion in more than 400 financings, mostly for resource companies. The largest of these was a $4 billion financing for Barrick Gold Corp. (TSX:ABX).
The company, however, faced the same challenges as others in the distressed industry.
Its end as a brokerage comes on the heels of Toronto’s GMP Capital slashing about a quarter of its workforce in January and Toronto’s Octagon Capital falling into bankruptcy in December.
Acquisitions such as Quebec-based Industrial Alliance Securities Inc.’s purchase of Ontario’s Burgeonvest Bick Securities Ltd. in November illustrate that the brokerage sector countrywide is shrinking.
“If this market goes on for another two years, we’ll see the 140 independent dealers in Canada reduced to below 80,” said Peter Brown, who co-founded Canarim Investment Corp. in 1968 and turned it into Canaccord Genuity, which is Canada’s largest full-service independent brokerage and has recently been chopping staff.
“There’s going to be huge consolidation.”
Perfect storm batters brokerages
The Canadian brokerage sector has been pushed into its downward spiral by diminishing revenue from two main business models: raising capital for public companies and managing individual portfolios.
Low oil and commodity prices have battered Canada’s resource-sector-heavy stock markets, making equity financings both smaller and less frequent.
The TSX composite index has fallen more than 15% in the past year; the junior TSX Venture Exchange is down more than 25%.
Industry insiders say major changes need to take place in order to save the TSX-Venture Exchange .
Not only are corporate financings being snuffed out, but wealth-management commissions are a fraction of what they were a couple of decades ago.
Brown estimated that Canaccord’s brokers made a 2% commission from wealth-management clients in 1995 and that the average commission in the industry has since dropped by more than half.
The rise of the Internet has also eaten into the business of wealth management.
Brown estimated that online brokerages have taken about 20% of brokerages’ historical wealth-management business.
“The model is broken," he said.
"You could not build a Canaccord today in this regulatory climate with those returns and those costs.”
(Image: Terry Salman closed the public brokerage side of Salman Partners on February 15 | submitted photo)
Dwindling number of brokerage firms
Fewer than 10 independent brokerage firms remain in B.C., and sector insiders expect that to soon shrink to three.
Executives at some of the surviving firms admit that they are losing money and say that mergers are a good way to become profitable.
“Realistically, we will have to be part of a larger entity to cut costs,” said Art Smolensky, who is chairman and founder of Vancouver’s Global Securities Corp.
Smolensky’s 130-employee firm has seven compliance officers who ensure that brokers operate ethically. Were the firm to double in size, it would still need only seven compliance officers, Smolensky said.
“Synergies” were behind the December merger of Leede Financial Markets Inc. and Jones, Gable & Co. Ltd., said Larry Martin, who is now Vancouver branch manager at the new Leede Jones Gable Inc.
Both those predecessor companies were headquartered in Calgary but had their largest presence in Vancouver.
Shayne Nyquvest is another industry veteran who was recently involved in a merger. He was president of Vancouver’s Jordan Capital until Toronto’s Mackie Research Capital swallowed that brokerage last year.
Nyquvest suggested that by the time Business in Vancouver went to press, another local brokerage would likely be swallowed or merged.
“The sooner we get down to three or four companies, the sooner we’ll be able to compete with banks,” said Nyquvest, who is now executive vice-president at Mackie, which has more than 350 employees Canada-wide.
Deregulation created “brutal bank domination”
Brown, Nyquvest and others say that the beginning of the brokerage sector’s demise started in 1987, when former prime minister Brian Mulroney’s government started deregulating Canadian banks and allowing them to enter the insurance, brokerage and trust company businesses.
Brown estimated that the banks now control about 80% of the brokerage business Canada-wide and are on their way to having a 90% stake, which he said points to an unhealthy lack of competition.
The U.S., in 1999, also deregulated its banks, but Brown said competition remained strong because the U.S. had more than 100 banking companies.
“In Canada there are only the Big Six,” he said.
Following Canadian bank deregulation, big banks bought brokerages. That’s how RBC Dominion Securities, CIBC Wood Gundy, BMO Nesbitt Burns and other brokerage behemoths were created.
“Brutal bank domination is another reason why independent brokerages will not survive,” Brown said. “There’s no margins.”
(Odlum Brown CEO Debra Hewson is optimistic about the future for her wealth management brokerage | Chung Chow)
Salman said that, in the late 1990s, banks provided what he called “bank letters,” which essentially vouched for a firm and enabled brokerages with little capital to double the amount of money they could deploy in financings.
Concern about systemic risk stopped that practice, he said, and made it more difficult for small brokerages.
Another key asset of Salman’s firm was its respected research. Salman started his career working in research at Nesbitt Thomson and built a strong reputation, which attracted institutional investors willing to pay large sums for insight into listed companies’ internal dealings.
Salman’s continuing enthusiasm for research is clear from the way he retained the title of co-director of research at his company and has a passion for public libraries.
He donated $300,000 and spent 16 years as chair of the Vancouver Public Library Foundation (VPLF).
Now chair emeritus at the VPLF, Salman has a library branch named in his honour, at the Hillcrest Centre.
The Internet and easy access to information, however, has diminished the value of research.
“No one is paying for research now, or very little for research, whereas they did historically,” Salman said. “That’s the bottom line.”
Independent brokerages’ business models vary
Not all independent brokerages in B.C. have been stung to the same degree by the dearth of corporate financings.
Odlum Brown, for example, does no investment banking.
The 93-year-old company is the largest independent employee-owned Vancouver-based brokerage firm, with “just under $10 billion” in assets under administration, its CEO, Debra Hewson, told BIV.
“We’re purely a retail advisory firm,” Hewson said. “We’re not only surviving but we’re thriving. Our firm is growing because we’re clear about what we do and what we don’t do.”
About 90 of the company’s 255 staff in its five offices are advisers. They take a commission on each trade they make for a customer or by receiving a set annual fee, which is a percentage of the client’s portfolio.
And while commission rates have fallen through the years, Odlum Brown’s size has allowed it to remain profitable.
Hewson said the company is not looking to get bigger by merging or acquiring competitors but rather aims to get better at advising clients.
“There will always be a place for quality investment advice built around client need,” she said.
Brown agreed. He said Odlum Brown’s model is much better than that of many other Vancouver brokerages, particularly if it is able to keep its advisers’ books of clients when the advisers leave.
Other Vancouver brokerages, such as Wolverton Securities Ltd., are focusing more on the wealth management.
“We’ve been diversifying our revenue streams and building out our wealth-management platform,” CEO Richard Butterworth told BIV.
“Salman would be disproportionately weighted to corporate finance and investment banking, so it was more vulnerable than an organization like we are [to market instability].”
Also, unlike Salman Partners, Wolverton does not have a research team.
“As a result, we haven’t staffed the business with a lot of expensive mouths to feed,” Butterworth said. “That’s unlike some of our other investment banking competitors.”
Wolverton does some corporate financings, but Butterworth said fewer than 10% are on the TSX Venture Exchange.
The company focuses instead on big boards in Canada and the U.S., which have been lagging for the past year but have not had as steep a downturn as those that are filled with small-cap stocks.
Unlike some firms offering wealth management, Oldum Brown employs research analysts to determine which companies it should include in its 43-company model portfolio.
Those researchers cost money, but their salaries are a worthwhile investment, Hewson said.
“Good people are expensive no matter what business you’re in.”•
Read Part 1 of this series: Major changes needed to save TSX-Venture Exchange
