The turn of the 21st century was a time of opportunity for boutique advisory firms. Independent firms targeting mass affluent clients and their advisors, boutiques had a proposition they thought the banks couldn’t beat: a less bureaucratic culture and a focus on client service over transaction volume.

What made this more attractive was the banks had swallowed up most of the independent brokerages through the 1990s and into the early 2000s, starting with RBC Dominion Securities’ takeover of Richardson Greenshields and ending with CIBC Wood Gundy’s purchase of Merrill Lynch Canada—the second time CIBC had bought Merrill Lynch’s Canadian operations. In between these landmark transactions, the banks bought many smaller investment dealers, creating behemoths with more than 1,000 advisors underfoot.

The time was ripe for independently minded advisors to move on: producers in smaller shops looking to move up to a bigger platform with a broader reach and more sophisticated technology and services, as well as corner-suite vice presidents frustrated by legacy technology, transaction volume pressure to move up the grid and the banks’ iron grip on their clients.

Supply often meets demand. In the early 2000s, a number of independent shops opened or expanded their ambitions beyond a regional market. The attractions to advisors were obvious: not just independence and flexibility, but also the idea of being treated like a partner rather than just another employee.

The beginnings of boutiques

In the early 2000s, Wellington West Holdings was recruiting. Richardson Partners Financial re-established a brokerage presence. Rockwater Capital Partners sought to recreate some of the culture of Midland Walwyn by building on the retail arm of Yorkton Securities. Raymond James had come to Canada with a takeover of Goepel McDermid. Niche dealer Griffiths McBurney & Partners went public and established GMP Private Client.

So how successful was this business proposition? Initially, the banks lost advisors to the independents. However, a firm is only as stable as its revenue base. Asset growth stalled for all brokerages during the financial meltdown of 2008-2009, but it stalled more for independents than it did for the Big Six banks. And the meltdown caused shakeouts, but fewer than one might have expected. Still, it led to capital injections from deeper-pocketed partners, mergers among some firms, takeovers for others, and some culling of advisors.

But overall, independent firms are upbeat about their prospects. They survived 2008-2009 and are growing faster than ever—or faster than the integrated brokerages run by the banks, according to data supplied by Investor Economics, a Toronto financial consultancy. The annual growth rate of assets under management has increased faster among independent full-service dealers than it has among the Big Six banks over the past five years. So has the number of advisors.

But what is an independent? The Investment Industry Association of Canada tracks the financials of 35 full-service, retail-oriented brokers. Unlike the banks, independents rely more on commissions from wealth management, but they increasingly have capital markets operations for new issues—primarily small- and mid-cap companies. Still, they have only one-sixth the revenue of the 11 integrated investment dealers, whose commission revenue alone is almost three times greater than the total revenue of independents.

Meet the players

The big independents are Wellington West, Richardson GMP, Raymond James, Macquarie Private Wealth and Canaccord Wealth Management. They have a sizable footprint: all but Macquarie have assets under management of around $10 billion apiece (Macquarie has about $8 billion). All are planning to double assets under management within the next three years.

Below them are what Wellington West founder and CEO Charlie Spiring characterizes as “micros,” small shops that risk being squeezed out by the banks and the larger independents. Spiring doesn’t think he could start his firm, founded in 1993, in today’s environment.

“The reality is that it’s a little harder,” he says. “At least now we have scale and size and one of the most profitable retail organizations in Canada.”

As the Canadian advisory industry has become more consolidated, there’s less room for error. Canaccord, for example, saw its assets under management drop from $15 billion to $8.5 billion during the financial crisis, reports Mark Maybank, chief operating officer of Canaccord Financial Inc. That included a nasty bout with non-bank asset-backed commercial paper in clients’ money market accounts.

Making changes

In the aftermath, Canaccord has downsized its advisor force from 400 to 280. Raymond James, by contrast, has grown. Of its 460 advisors, 400 enrolled in the past 10 years. Still, 2008-2009 was both an opportunity and a challenge for firms.

“The years 2008 and 2009 were obviously critical for any advisor in the business,” says Peter Kahnert, senior vice-president at Raymond James. “A big point of differentiation is among a lot of the independent firms, we continued to be profitable during those times.”

That involved strong client relationships, of course, to keep investors maintaining their course through the downturn. But it also required strong back pockets to keep the business afloat amid bleeding on the revenue side. Kahnert notes Raymond James has a consistently profitable retail side; losses at Maybank led to a restructuring of its wealth management division, including the top management. Canaccord hired John Rothwell away from Wellington West to reinvigorate wealth management.

But for some independent brokerages, it meant reinventing their model—hence the merger of the wealth management divisions of Richardson Partners Financial and GMP Wealth Management to form Richardson GMP Limited.

“Richardson Partners Financial were competitors of ours from the moment we at GMP Private Client started up,” says Andrew Marsh, who is now CEO at Richardson GMP. “They started about a year before we [at GMP] did. We had remarkably similar strategies looking at hiring remarkably similar advisors, with remarkably similar cultures. So when the market downturn of 2008 hit, it allowed us to start looking to each other for consolidation opportunities.”

And there were opportunities. Wellington West was looking. So was Australia’s Macquarie Group. Both bid on Blackmont Capital Inc., the retail division of Rockwater Capital that had been orphaned by CI Financial Corp. Macquarie won. A buyout saves on the expensive shoe leather of recruiting door-to-door.

“It’s just too difficult to have a national presence, which is what Macquarie wanted, on a one-off, hiring-one-advisor-at-a-time basis,” argues Bruce Kagan, now the CEO of Macquarie Private Wealth and formerly chair of Blackmont. “The reality is that by purchasing Blackmont, Macquarie was able to take it up to scale and have a national footprint, all at one go.”

As for Wellington West, it was preparing to go public. “We had gotten ready for 2008,” explains Spiring. “When the markets started to sour early in the year, I made a pragmatic decision and we sold 12.5% to National Bank of Canada.” That allowed Wellington to make a bid for Blackmont. “So in lieu of the IPO, we took a major partner on. They gave us a lot of good advice and they’ve helped us take a couple of swings at some of the other intermediate-sized brokers we wanted to buy.”

No one is ruling out an acquisition, because national footprints are increasingly important to establishing not only a trusted brand, but also scale. Does scale change the business model? Macquarie’s Kagan doesn’t think so.

“Like most other wealth management firms, we’re targeting more affluent clients who are looking for a relationship with an advisor who truly provides a holistic approach to wealth management,” he says. “It’s not just trade execution. It’s about: ‘Let’s understand what your goals are together and then figure out the best way to get there with a risk tolerance you’re comfortable with.’”

The right offerings

Advice remains supreme. “In our world, retail drives the engine. It is profitable and it’s the most important piece of the overall firm,” notes Kevin Whelly, senior vice-president at Raymond James.
Nevertheless, it helps to have a little bit more to offer: capital markets research, unique asset programs—something more fully rounded.

“Most advisors want new issue flow and access to really good research,” Kagan points out. “What Macquarie has been able to deliver is both global and local research. With respect to individual companies, macroeconomic pieces or strategic pieces, [and] deal flow, Macquarie is involved in almost all sectors of the Canadian marketplace and our advisors are able to distribute those new issues to our clients.”

Clients want investment research, and they want access to new offerings as well as alternative assets. In a sense, Richardson Financial pioneered that space with its private equity programs. Now Wellington West is picking up that niche with unique products.

“It’s really helped us through the bad market cycle here by being a bit of a contrarian, and hence we brought out some nice one-ticket solutions that have a multitude of asset classes, bond, stocks, infrastructure, real estate, REITs and private equity,” says Spiring. “It’s one of a kind in Canada and it’s selling very well for us.”

But capital markets activity—financing new issues for small- and mid-cap corporations—has helped too, he adds. “It’s a bit of a cash cow, since more than half of the profits are coming out of capital markets,” says Spiring. “When you look at some of our competitors out there, they haven’t quite figured out how to be as successful as we have been in capital markets. You’ll see we are the top of agriculture, mining and in energy. Five years ago, [those sectors] weren’t even on the radar screen. No one on the Street has the connection we have between wholesale and retail.”

But for which advisors? And which clients?

The independent firms aren’t necessarily looking for high-net-worth clients. In any case, the big dealers, trust companies and private bankers have probably locked up most of them. Instead, the typical client has between $200,000 and $1 million in investable assets. Although there are high-net-worth clients, they are not necessarily the focus. Similarly, the typical advisor has a somewhat different profile: at least five years in the business and more than $20 million in assets under management, but generally in the area of $50 to $100 million.

“We’re not actually prescriptive with respect to the type of advisor we’re looking for,” says Kagan, who has added 30 advisors to 155, and hopes to cap the advisor force at 250. “We would like a combination of transaction-focused and fee-focused advisors,” he says. “It creates more of a smooth revenue stream for us. Having said that, the main focus for us is on advisors who put their clients’ interests first and are very talented at what they do. We have not hired certain advisors [who] would be larger producers because we just didn’t think that they were as client-focused as what we were looking for.”

Client focus is the competitive proposition among independent firms. “Our whole firm is built on hiring seasoned, experienced, professional advisors who typically have been in the business 15 to 20 years,” says Marsh. “So the strength of the client relationship has been tested over a long period of time. The service offering that our very high-quality advisors offer to their clients [is] industry -leading and I think that breeds very strong client loyalty in good times and bad. We saw that proven in 2008.”

Most independents don’t train new recruits, while the banks have gotten better at retaining staff. Still, “three-quarters of our new people have come from the banks,” says Spiring.

Thin spread

While the prospects for asset growth and new advisors appear rosy, independent firms do face an important economic challenge—one that trims the margin for error. It’s something Maybank noted in a conference call for investors: low interest rates.

“[We aggregate] the cash balance that a client leaves with us overnight so the clients get a half percent and we get 1.5 percent,” says Spiring. “We lend it out or manage it under margin account spreads. That cash sitting there has been compressed a little bit because rates are so low. If rates go back up to 3% or 4%, instead of making a 1% spread we make a 2% spread. There’s no broker to share it with; it’s just a nice fee that goes to the bottom line and helps us fund our growth initiatives.”

And assets under management are crucial too. Independent dealers aim to get bigger, just not as big as the banks. How big do they need to be to survive? Maybank cites $14 billion as the inflection point where wealth management becomes profitable. Some firms do it with less.

In turn, that requires a national footprint. That was one reason for the Richardson-GMP merger.

“When you’re a growing boutique, it’s a challenge to establish footholds in new markets,” says Marsh. “You are talking to potential recruits and they’re saying, ‘We’re interested in joining you, let us know where your office is,’ and we have to say, ‘We’ll let you know where the office is as soon as you come and join us.’ So what we have with this merged entity is a solid national footprint with a financial platform that’s got the scale, strength and stability to look selectively at additional markets where we see selective opportunities.”

Definition of success

Raymond James finds having a two-track model—employees and agents—helps cover the landscape, allowing for offices in smaller locales that wouldn’t sustain a corporate office. And Whelly
is optimistic about Raymond James’s growth prospects.

“From the retail perspective, we expect our growth will come from three sources: 5% from market factors, 5% from organic growth from our existing advisors, and 5% from new advisors that we attract to the firm. This all rolls up to a targeted 15% growth in assets under administration and revenues per year.” With this target, Whelly expects that assets will exceed $20 billion within three years.

That’s a target many think is within reach for their own firms, says Spriring. “I think the first one to get to $20 billion among the super independents wins the game.”

The Big Six and Other Firms Compared

Assets for Big Six Firms: $568B, 3yr CAGR=1.1%; 5yr CAGR=3.9%
Assets for Other Firms: $175B, 3yr CAGR=0.4%; 5yr CAGR=6.7%

Big Six: about 6,200. 5-yr CAGR=0.6%
Others: about 4,100. 5-yr CAGR=3.2%
Source: Investor Economics Retail Brokerage Report, Fall 2010

Originally published in Advisor's Edge