5 tips for competing as a small, independent dealer

Dozens of small firms have either gone out of business or been swallowed up by acquisitions in recent years.

The Investment Industry Association of Canada says 36 retail firms have resigned from IIROC since 2011, some through mergers and acquisitions, and an estimated 30 more retail boutiques are under earnings stress.

Technological disruption and the increasing costs of regulatory compliance have created a new ballgame for smaller dealers as big firms, including the banks, expand through acquisitions and use their scale to compete on costs and pricing.

How should a small, independent firm compete amid such headwinds?

Read: In the advisory world, size matters

1. A unique offering

Brian Parker, chief executive of independent firm Acumen Capital Partners in Calgary, suggests firms find a niche.

Acumen, which he says has been profitable every quarter for the past 10 years, specializes in small caps, growth stocks and energy. “You have to have value. […] You have to have something that’s unique. We are chasing good, under-followed growth stocks that are of institutional quality,” he says.

The firm’s bread and butter, he says, is small caps. Acumen was the first underwriter on wood products company Stella-Jones Inc (TSX: SJ), he says, when the company had a market capitalization of about $80 million. A decade later, it’s worth $2.8 billion.

Sam Febbraro, executive vice-president of advisor services at Investment Planning Counsel Inc., similarly says that small firms can either choose to be a low-cost provider or use their creativity to stand out.

“They have to find how they’re going to provide value, as opposed to fighting on cost and price, because the larger firms will win at that game,” Febbraro says.

Discover your value and take the attitude of disrupt or be disrupted, Febbraro says. That may mean partnering with a robo-advisor or a larger firm aligned with your business and strategy. “I think most firms have to look at their business plan and say, ‘Can I do this with the resources I have available to me, or is it something I can expedite […] being part of a larger company or group of companies?’” Febbraro says.

2. Keep costs lean

Amid higher transaction fees and bigger regulatory costs, smaller firms must be lean on expenses.

“We look long and hard at everything, all the time,” says Parker. “Whether it’s our lease costs, our clearing broker, you name it. We’re constantly looking at getting the best value.”

The firm’s advisors are also its managers, Parker adds: “All of management here, we’re all producers. There’s no extra layer […] all the key producers are large shareholders. They’re involved in management decisions at the executive committee level and board of directors level.”

Firms implementing CRM2

IIAC, an industry association representing 132 IIROC-registered dealers, says member firms have started providing clients with new transparency reports six months earlier than mandated by securities regulators. The reports disclose investment performance and the fees and charges paid for financial advice according to CRM2 regulations. “Advisors look forward to discussing the many ways they create value for their clients—from effective investment advice based on a deep understanding of the client’s goals, risk tolerance and time horizon, to helping clients make the right investment decisions and achieve their financial goals,” Ian Russell, head of IIAC, said in a statement on January 27.

Read: ‘Scale is what makes this thing work’: IA executive on Hollis purchase

3. Invest in technology

Keeping costs low is a priority, but don’t skimp on your technology investments.

About three years ago, Acumen made significant investments in its trading platform, bringing it in-house. It now uses the Fidessa trading system, with an annual budget of $250,000. It also pays for algorithms and the ability to trade on multiple exchanges.

The firm also invested in technology for its retail clients, including the Croesus platform and additional client-facing research and account management tools.

“We’ll likely have an increased spend over the next year on cybersecurity, in terms of how to we make sure we’re protecting our clients’ files at the highest level,” Parker says. “We’re constantly spending money on technology. We have to.”

4. The smaller accounts opportunity

As the banks and bigger wealth management firms seek wealthier clients, they’re turning away small ones. Parker says some banks are becoming disinterested in advisor commissions on accounts under $250,000, and those advisors and their clients are an opportunity for small firms to pick up.

“I see an ability for us to grow our retail presence here over the next couple of years, as the banks are nudging these quality [advisors] and prodding them to think about whether they fit in the bank long-term,” Parker says.

Some banks, for instance, may have policies outlining higher sensitivity to business risk, and are increasingly seeing smaller-account clients as too much risk relative to revenues. Parker says these are good clients for firms with lower costs.

To put it broadly, small firms can benefit from their agility and creativity, being free from the limitations of outside shareholders or sweeping corporate policies.

Read: Are smaller investors getting the boot?

5. Clients first

Regulatory discussions and industry practices have been affecting commissions, transparency and the way firms sell products. But they do not have to negatively affect the business. In fact, if the changes are what clients want, and they mean better client services, they can be an advantage.

“My first job was at the old Richardson Greenshields,” Parker says. “Their philosophy, which is one that I carry to this day, is when you’re doing business, it’s got to be in the best interest of your client, the firm, and then yourself, [in that order]. If you maintain that mantra, you can’t help but do good business.”

Read: 34 ways to be a better advisor

by Simon Doyle, an Ottawa-based financial writer.