Some 28 independent institutional investment firms have exited the industry through amalgamation or shuttered operations since 2012 due to deteriorating earnings performance, poor investment banking revenues and rising costs, according to the Investment Industry Association of Canada.

In a letter published recently, Ian Russell, president and chief executive officer of association, wrote that 53 small independent firms lost money in 2015. “We estimate about 13 of the money-losing firms in 2015 are in the institutional grouping. Unless market conditions improve significantly in the near-term, many firms in this group will likely disappear in the next year or so.”

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Not everyone sees the situation as being so dire, however. “Firms come and go, but we’re not seeing a noticeable decline,” says August Cruikshanks, director of research at Eckler Ltd., noting the association’s database of institutional money managers is likely different than the industry standard, eVestment, that Eckler uses. IIAC said it’s referring to firms that generate most of their revenues from serving institutional clients or through capital market operations, such as FirstEnergy Capital Corp., GMP Capital Inc. and Goldman Sachs Canada Inc.

“If I do a basic query of all the firms in the database to see which ones are based in Canada, it looks like it gives me exactly 100. To me, that sounds about right,” says Cruikshanks. “Now, how has that changed over time? Sure, there are ebbs and flows, there might be a general trend towards consolidation, but not in the big way [Russell] is suggesting he’s seeing in his world.”

On Dec. 1, 2014, Toronto-based Mackie Research Financial Corp. acquired Calgary-based Jennings Capital Inc., a move that highlighted the pressure on Canada’s smaller investment firms in a volatile market. Another example is Toronto-based investment dealer Octagon Capital Corp., which entered bankruptcy at the end of 2015, with its chief executive officer citing “too challenging of a business environment,” according to an article in the Globe and Mail.

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The faltering independent institutional firm sector has resulted in significant employment reductions in the industry, according to Russell. As of the first quarter of 2016, he noted, layoffs were up sharply, amounting to about 518 or 17 per cent of total employees in the firm grouping since 2012. “These are the first significant layoffs in the boutique sector in many years.”

The surviving independent institutional firms, according to the letter, have consolidated operations, cut costs aggressively and honed their competitive edge. “These advantages include effective research on mid-cap companies, broad and effective securities distribution and trading capability, well co-ordinated research and trading expertise, and strong institutional and corporate relationships,” wrote Russell.

He also noted the competitive pressures on independent institutional and retail firms have intensified as business conditions have remained weak. Moreover, independent firms are coping with the rising costs associated with technology and regulatory compliance.

In the larger investment firm space, Cruikshanks isn’t seeing those cost impacts to the degree Russell described, although he acknowledges that technology and compliance issues are pressures everyone is facing. In the retail space, with the Client Relationship Model, Phase 2 (CRM2) rules around fee disclosure in Canada now in effect, Russell noted there will be an impact on firms registered with the Investment Industry Regulatory Organization of Canada.

But those rules don’t affect the institutional space, says Cruikshanks. “This is nothing new or groundbreaking, but the whole retail world needs to be reformed, if you look at fees alone, not to mention disclosure and transparency. There’s really a huge gap between the standards we have in the institutional world around those things, versus what we’ve seen with some of these [retail] firms.”

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