Thomas Caldwell on the decline of traditional stock brokerages

“I wouldn’t go into this industry now,” laments the founder of Caldwell Securities, citing shrinking margins and stifling regulation

Caldwell Securities founder Thomas Caldwell

Caldwell Securities founder Thomas Caldwell. (Portrait by Roberto Caruso)

When Thomas Caldwell opened Caldwell Securities in 1981, owner-operated brokerages like his were still the main way Canadians accessed the stock market. But times have changed. Banks have taken over most of the large investment dealers. As for “boutique” firms, 50 have either merged or folded in just the past four years, according to the Investment Industry Association of Canada. Recent casualties include Salman Partners, Octagon Capital and Jacob Securities.

“I wouldn’t choose to go into this industry now,” Caldwell admits. The move toward low-fee, advice-free products is compressing brokers’ margins. Meanwhile, the cost of complying with increasingly onerous regulations exceeds 50% of a firm’s administrative expenses, he says. “The traditional broker is long gone.”

As a student, Caldwell wanted to be an architect but went into economics after following his then girlfriend (now wife) to McGill University. He says his firm, which these days also manages mutual funds, is staying afloat by staying the course. “I like to say we’re gratefully profitable and not get-rich profitable anymore.”

An old-school value investor who believes strongly in active management, Caldwell takes issue with the rise of fee-only advice. He insists it’s costlier to clients because they have to pay up whether the adviser has a good idea or not. By contrast, if he doesn’t help his clients make money, then he doesn’t get paid (though Caldwell Investment has some fee-based offerings too).

As for regulation, “the burden is so great that the model is broken,” Caldwell says. He’s especially bothered by Canada’s adoption of International Financial Reporting Standards. “No one understands it, and it’s tremendously costly,” he says.

Caldwell laments the loss of the small investment banks the most, because these firms have helped numerous Canadian companies get off the ground, especially in the mining sector. Big banks, he says, typically don’t support early-stage companies. If there’s no one left to fund them, he fears for the resource sector’s ability to rebound from its current slump. “Canada is a great country [in which] to start a business, but it’s not a great country to build a business. You have significantly curtailed access to public capital.”

The things Caldwell Investment provides—advice and investment management—are more important today than they were in 1981, he says. Now it’s even harder to know who the big firms are serving—themselves or their clients—and increasingly exotic investments have made investing far more complicated.

He sticks to buying undervalued stocks, especially ones trading below their net asset value. He likes companies that consistently grow their dividends. He’s keen on banks, especially American ones, though the exchange rate and relative valuations are causing Caldwell to cast his gaze back at Canada. Suncor Energy (TSX: SU) exemplifies what he likes to buy, though he’s not scooping it up just yet. “It’s well-funded, it has good management in a totally depressed industry, and it can acquire companies that are not as well-funded,” he says. “That’s advantageous.”

Despite his reservations about the investment industry’s direction, Caldwell insists his firm is not for sale. “I’ve been in this business for 35 years, and I’ve been able to adapt,” he says. “Industry dynamics change. We’ll keep adapting.”