Canada's Boutique-Broker Bust May Be Over But Lessons Remain

(Bloomberg) -- The crisis that wiped out a quarter of Canada’s independent brokers seems to have halted.

Four new firms signed up with the Investment Industry Regulatory Organization of Canada in the first five months of 2017 and only two deregistered. That compares with net dropouts over the last four years as plunging commodity prices and higher compliance costs favored big banks.

Boutique dealers were also battered by Canadian investors’ post-crisis aversion to risk capital, which prompted them to avoid the kind of companies that typically work with smaller brokerages. Such firms funnel research and capital into small and mid-cap companies, which account for more than a quarter of volume traded in Canada’s equity markets.

"Life for independents has gotten better over the last six months," Dan Daviau, chief executive officer of Toronto-based independent broker Canaccord Genuity Group Inc., said by phone. "Investors are all of a sudden saying, ‘Hey, I don’t mind taking a little more risk, I don’t mind investing in an early-stage tech company or a mining company that’s just discovering stuff.’"

Canaccord survived the bust because two-thirds of its revenue came from outside Canada in the year through March 2017, though at C$5.17 its share price is well below the peak of C$13.40 reached in 2014.

Others weren’t as lucky. Fraser MacKenzie, Octagon Capital and Salman Partners shut down while consolidation saw Raymond James Financial Inc. buying MacDougall, MacDougall & MacTier Inc. and Echelon Wealth Partners Inc. acquiring Dundee Goodman Private Wealth.

The number of boutique dealers could fall to 100 from about 200 before the financial crisis, said Ian Russell, CEO of the Investment Industry Association of Canada.

"Over the last couple of years the number of firms throwing in the towel has dropped off quite a bit, but we keep a watchful eye because there might be 40 or 50 small firms that are still struggling," Russell said in a phone interview. "If conditions slip or stay roughly the same over the next couple of years, we will see further shrinkage."

Looking For Alternatives

A shortage of small brokers risks wiping out Canada’s small and mid-cap equity markets. Companies listed on the TSX Venture Exchange and Canadian Securities Exchange accounted for 25 percent of volume traded in Canada’s equity markets in the 12 months through March 31.

The small-cap market -- heavily weighted toward junior miners -- struggled from 2011 to early 2016 as global commodity prices plunged. TSXV-listed companies raised just C$3.3 billion of equity capital in 2015, down 66 percent from 2010. Between its post-crisis high in early 2011 and its low in early 2016, the S&P/TSX Venture Composite Index fell about 80 percent. 

To counter the slowdown, TMX Group Ltd. is working to attract more early-stage tech companies to the public markets and reduce its reliance on miners. Ungad Chadda, president of capital formation for equity markets at stock-market operator TMX Group, is also looking to replace boutique dealers with new sources of funds.

"There are other pools of capital that could be brought in to supplement the absence of having a very vibrant boutique dealer market," he said in an interview at his Toronto office. "The pension funds have a lot of capital, the VCs are doing lots of deals, private equity is awash with cash."

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Jeanette Rodrigues, Steven Frank