Independent agents better able to cope with brokerage downturn, but OSC still says no

By Scot Blythe | March 6, 2003 | Last updated on March 6, 2003
4 min read

(March 6, 2003) Traditional brokerage firms are getting walloped as retail trading declines and investors prove loathe to put new money into mutual funds. Despite that, Raymond James finds its U.S. brokers are faring well. A major reason is that most of them are cost-conscious independent contractors, something that still isn’t allowed in Canada.

The Investment Dealers Association approved the principal-agent relationships that have long characterized the mutual fund and insurance industries in October 2001, but the Ontario Securities Commission has so far been reluctant to approve the IDA by-law change. Under current regulations, securities brokers are considered employees. That, says Peter Bailey, executive vice-president of Raymond James Canadian operation and a former IDA official, is emblematic of regulatory oversight that diminishes the “s” in SRO to something very small.

Bailey, speaking on Tuesday at an investment fund strategy summit in Toronto sponsored by the Strategy Institute, suggested that OSC oversight over the IDA, plus oversight by the Canadian Investor Protection Fund (CIPF), is making regulation onerous as well as pumping up costs for investors. He cited one instance where an IDA member firm went through a required external audit as well as spot audits from the IDA, CIPF and OSC, all in one year, all based on the same year-end books.

While investors are flocking back to investment advisors, having been burned by their own self-advice, they are nonetheless wary of high fees, conflicts of interests and advisor payouts, issues that have been spotlighted by the media, Bailey added. But they are turning to brokers and advisors because they want one-stop shopping.

That puts pressure on advisors for more education. Where a financial planner might have referred a client to a broker to buy stocks, increasingly mutual fund reps and insurance agents are opting to obtain securities licences so clients can get all their accounts under one roof. Similarly, the broker might now also be a financial planner, and able to take over the all the accounts.

But the regulators are making it more difficult for advisors to meet investor needs. Recent regulatory proposals are far too intrusive, Bailey said. He reiterated the IDA’s criticism of the OSC’s fair dealing model, warning that it might be applied to the mutual fund world, too.

In particular, Bailey said the limitation of advisors to one role, as either a discretionary portfolio manager, a transaction-oriented broker or a service provider for a self-directed account goes against the drive toward one-stop shopping.

He also finds the OSC’s proposals on fees intrusive. He argued that it should be up to the brokerage about how services and fees are bundled together.

“We do the transactions, we do the execution, we do the settlement and provide the advice and the research. We commingled all that and charged a commission,” Bailey said. “What [the OSC] is saying now is that discount brokers can do these trades for $10 a transaction, therefore charging a $200 commission is not fair. Well, it’s a question of bundling or unbundling: $10 for the transaction, $10 for the execution and $100 for the advice. Why should that be a matter for regulators?”

He also called the fair dealing model duplicative, requiring a new client agreement form — with basically the same client data contained in the documents used to open an account — stretching to 14 pages. “It’s the same information, just in a different format,” he said.

With the regulators unsympathetic to principal-agent relationships, Bailey doesn’t think incorporation will come to pass soon, even though in the U.S. Raymond James’s experience is that independent contractors are more scrupulous about compliance than employees are, perhaps because they stand to lose their business. Still, he believes the securities industry should be pushing for incorporation.

“There really are no compliance or regulatory issues once you get your mind around the principal-agent [relationship], which basically says that the client can rely on the principal as opposed to the agent if something goes wrong,” said Bailey. “That’s basically a contractual relation between the principal and the agent to make that liability happen. Once you’ve got that, it really doesn’t matter if you’re incorporated or not. You can’t hide behind the corporation. “

In the United States, Bailey noted, 75% of the Raymond James agents are independent contractors. “In these markets they have still remained profitable, because once again, the overhead [costs] are paid by the representative. It’s amazing how much less sales representatives need when it’s coming out of their own pocket.”

Commingling of businesses is not a concern, suggests Bailey. Activities that require registration go through Raymond James; for the other business that an advisor might have, the agent has to disclose that these activities are not the responsibility of Raymond James.

Another benefit of the independent contractor model, Bailey suggested, is that it allows agents to make a decent living without having to rely on the tiny number of high net worth clients every advisor targets. “There’s a lot of normal Canadians who make good money but no one wants to target them,” Bailey said. Entrepreneurial advisors are more likely to seek smaller niches than the big brokerages that are saddled with fixed costs for employees and pushing for ever-larger books.

Do you agree with Bailey and his views of the principal-agent relationship? What are your views of the OSC’s fair dealing model? Share your thoughts in the “Free for All” forum of the Talvest Town Hall on

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