Having spent 33 years in the brokerage industry, Mark Polubiec was well acquainted with its often vicious cyclicality. Even so, the gathering clouds he saw late last fall left him fearful for Fraser Mackenzie, the small firm for which he served as chairman and CEO. Although it was well capitalized, he says, its revenues dwindled abruptly. After months of considering the options, Fraser Mackenzie’s 22 shareholders (most also employees) decided in April to wind the firm down. “We could have ridden it out for at least a couple of years,” Polubiec says. “But at the end of that, if nothing had changed, we’d have squandered our capital.”
Fraser Mackenzie’s closure is emblematic of the challenges facing Canada’s approximately 185 boutique investment dealers. Like many others, it derived much of its revenues from fees earned helping early-stage resource companies raise money on equity markets. That business has dried up. According to Ernst & Young, the proceeds to mining companies from initial public offerings last year fell 81%. It’s not that resource companies don’t need the money; a report prepared for the Prospectors and Developers Association of Canada warned many juniors have “perilously low” working capital balances. But investors’ aversion to risk left juniors almost wholly unable to raise money.
Fraser Mackenzie faced another challenge that sealed its fate. It served institutional clients, helping them buy and sell shares primarily on Canada’s largest exchanges. In recent years, those clients have gained access to new, lower-cost channels such as direct market access (DMA), electronic trading facilities that allow them to bypass intermediaries and execute their own trades. The resulting downward pressure on trading fees broke the business model of many brokers. “That’s a permanent change,” Polubiec says. “It’s not something that will come back.”
Aggregate industry figures suggest the brokerage industry has held its own since the 2008–09 financial crisis. Its roughly 200 firms still employ about 40,000 people, and total revenues are broadly flat. But this conceals the strikingly different fortunes of integrated dealers (larger firms, including those owned by the Big Six banks, that do business across the country and in multiple business lines) and so-called boutiques. Surveying industry data, Ian Russell, CEO of the Investment Industry Association of Canada estimates 65 boutiques consistently lost money during the past two years. Things became particularly difficult, he says, after Canadian equity markets plunged in mid-2011.
Absent a substantial rally, Russell expects greater attrition among boutiques. “You could see 20 or 30 disappear over the course of the next year unless this thing turns around,” he says. Polubiec agrees. Before throwing in the towel, Fraser Mackenzie considered merging with similar firms. But after surveying the industry, he concluded many were in worse shape than his own. “I don’t know about how some of them can deal with severance of their employees,” he says.