Boutique investment firms, both retail and institutional, have faced exceptionally difficult conditions in recent years, with 2015 going down as especially forgettable.
In his latest industry letter, Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC), explains just how bad it’s been, and why he’s still optimistic the boutiques’ fortunes could turn around.
1. Drop in the number of firms in the industry:
- 168 firms at the end of 2015 compared to 175 at the end of 2014 (and 196 at the end of 2012).
- This is attributable to a “perfect storm” of adverse cyclical and structural business conditions, the need for technology and the relentless rise in regulatory costs.
2. Extensive rule-making undermines the viability of boutique firms.
- For the 27 full-service retail boutique firms, operating costs rose a whopping 10% in 2015 compared to 2014 – the largest annual increase in 10 years.
- This huge cost increase, occurring in a low inflation environment, reflects measures taken by these firms to hire compliance specialists and consultants and adopt the necessary technology and systems (and hire related staff) to comply with the new CRM rule framework.
- Given the dramatic cost increases, regulators should undertake a careful cost-benefit analysis of new regulatory initiatives before any are put forward for comment and implementation.
Despite poor markets and an escalating regulatory burden, Russell sees upside potential for independent firms. His four main reasons:
- If oil prices demonstrate continued stability and further upside, financings will pick up and independent firms will benefit.
- Independent firms have made significant expenditure cuts and the necessary adjustments in operations to improve competitiveness.
- Independent firms are client-focused with tightly coordinated research, trading and investment banking platforms to respond nimbly and quickly to emerging opportunities in the marketplace.
- Independent firms are well capitalized, without conflicted business relationships and deep knowledge for broad placement of mid-cap securities in domestic and offshore markets.