Surviving a dealer buyout

By Al Emid | October 20, 2009 | Last updated on October 20, 2009
4 min read

Independent investment dealers are increasingly becoming the target of buyouts. If an affiliated advisor is not prepared, a buyout can leave them in the lurch with increased personal costs and strained client relationships.

Unresolved questions overhanging the recovery typically focus on the investment landscape, potential yields on various assets, length and breadth of the recovery and other issues. However, other unresolved questions involve the financial advisor’s own business landscape, including issues such as whether the continuing shrinkage in the number of mutual fund dealer firms will slow due to more investor money becoming available or if it will accelerate due to increased availability of capital for buyouts.

Complicating the puzzle, some advisors question the continued viability of the independent dealer model, citing rising compliance costs, pressure on profit margins, fee compression and increasing competition between advisory firms and other venues such as online trading platforms.

Canadian banks are expected to affect the consolidation of fund dealer firms as they have in other financial areas such as securities.

“I think that there’s a huge push for more dealer buyouts and I think that banks have figured out that (the companies on the Mutual Fund Dealers Association platform) actually do have real distribution and do have real assets,” suggests Paul Nemethy, senior vice-president of retail distribution at MGI Financial Inc., a wealth management subsidiary of Jovian Capital Corporation currently recruits advisors and plans to look at acquiring small dealers. As a former advisor, Nemethy witnessed five dealer buyouts.

There’s a lot of buzz in the marketplace that banks are starting to look for the next move to consolidate their strength in the financial marketplace, he says, pointing to the Bank of Nova Scotia’s 19% stake in DundeeWealth Inc.

An advisor looking to soften the impact of a dealer buyout can choose from strategies that involve branding, the contract process and the advisor/client relationship.


An advisor who promotes the dealership instead of their own firm identity can end up badly disadvantaged if they dealer sells out, Nemethy says.

“More and more larger advisors are realizing that they have to have their own name or their own relationship and they’re the brand,” he says citing Harry James Financial in Markham as an example.

Branding tops the list for some advisors, reflecting a belief that a known brand embeds the relationship more clearly in the client’s thinking. Some advisors advocate setting a specific proportion of total revenues on advertising, in some cases ranging up to 5% of gross revenues.

This may include selecting a media consultant to assist with targeting the appropriate demographic for the advisory firm. This strategy also has to consider the dealer’s attitude towards advisor branding, since some dealers are more or less sympathetic to individual advisor branding.

Branding options include branding at the community level through inexpensive community newspaper ads. Other options include local sponsorship of sports teams, charity events and golf tournaments. Advisor seminars appear to have returned to favour as a branding venue, possibly because of the apparent financial market recovery.

Branding strategies should also include ensuring that all paperwork sent to clients has both company names displayed with equal prominence, so that the advisor’s company name is not less obvious to the client.

Contractual strategies

Contractual strategies in advance of signing with a new dealer can include asking for a clause granting the advisor the right to first refusal if the dealer decides to sell the company, meaning that the advisor has a chance to put in an offer for the dealer, thus preserving his or her interests.

Strategies here can also include clarifying the restrictions that would apply if the advisor decides to leave, reflecting a belief that the advisor has a much stronger negotiating position at the time of signing than at a later date when the relationship has soured.

This may include negotiating for assistance in moving clients if the advisor decides to leave with forms of assistance including computer linkages to allow for opening new accounts automatically and following completion of necessary regulatory forms. This saves large amounts of administration and helps prevent client migration. Provisions here can also cover disposition of the advisor’s equity holdings in the dealer in the event of a separation.

Client communication

Advisor/client relationship strategies can include using a client engagement letter to establish that the client’s relationship rests with the advisor as opposed to the dealer, which is the advisor’s service provider. This embeds the advisor-client side of the relationship more firmly than otherwise.

A “lean and mean” strategy can also work to insulate smaller niche players from the negative effects of a takeover, Nemethy suggests. A small advisor roster will have a lower compliance burden. He profiles one example as a small dealer with a limited roster of advisors and $140 million in assets and one branch and one compliance officer. “They can deliver what regulators require because there are so few reps involved.”

Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.


Al Emid