Applying the triple win to the exempt market | Thoughts on the direction of evolution from a key industry leader
By: Peter Figura
To say that the National Instrument 31-103 changed the Exempt Market industry is stating the obvious. Now nearly three years later, the industry, although definitely still in the building stage, is looking for directions to grow, mature, and move on to the next stage of development.
Key Considerations for our Exempt market
With so much happening over the past three years there are some very important questions that will most likely need be answered within next one to two years. The most important are: Is the Exempt Market industry developing to model the existing IIROC environment? Second, what has to be done to maintain profitability for the dealers? How will the advisors have to look at their current practices in order to stay in business, what do the dealerships have to do in order to attract the best advisors to join them first, and then to retain them?
There is no doubt that the dealership model is here to stay, but from the early (although with less than three years using this term is somewhat awkward) stages of the dealerships forming, it is now obvious that some clear patterns are being established.
With many opinions that you cannot apply the IIROC model to the Exempt Market world, it is hard not to notice that soon we will most likely be dealing with two types of dealership. Large dealerships – with possibly national exposure, and 150 plus advisors registered. And the small dealerships – with up to 20 advisors, and a more boutique approach to the product offering. We have already seen some mergers, takeovers, and yes, unfortunately, some folding. But the question remains the same: How can the dealerships survive in a very competitive environment both internally and externally?
There has to be in my view a win/win/win situation for the Dealership, the Advisor, and Issuers, because only this type of environment guarantees a solid and steady growth of the industry. This paradigm also makes sure that the last piece of this model, the investor, is confident enough to support the Exempt Market environment by assigning larger portion of the investment portfolio to the private products.
Exempt Market Dealers
Let’s look into the dealership situation. First, there is definitely a learning curve. Many of them are being formed for the very first time, and by the management teams with somewhat limited experience in the investment field, and therefore experiencing some growing pains, and in some cases steering the dealership activities in the wrong direction. If we look into the IIROC model (even agreeing that the EMD’s are operating in a different way) the key elements are: the sales of the producing advisors, and on the entire support system that the dealership is putting in place.
For the dealership to be a successful one, a group of profitable, producing advisors, focused on their business growth is necessary. Advisors that follow the industry rules, and therefore are ‘compliance issues free’ are also invaluable. The dealership can operate based on the commission sharing with the advisors (denoted the grid) and this is one of the problems that might potentially create issues between all 3 participating parties (the dealership, the advisor, and the product manufacturer)
Prior to the National Instrument 31-103, and with no dealerships in place, there was no issue of the commission splitting (the grid) from the issuer for the advisor. Second, with more products being offered through the EMD system, there is a danger of the situation that higher commission offered by the manufacturer may attract some sales, but only because of the commission offered and not because of the product itself (in the IIROC world commissions through the dealerships are very similar and remain competitive).
From the dealership’s point of view, the increase of the dealership portion of the commission from Issuers (again, common in the IIROC world) can threaten their existence if the advisors start leaving for a dealership that offers a better payout.
The solution is probably not that simple, but again would require cooperation from all 3 parties involved: Dealers, Issuers, and Advisors. An understanding that the smaller payouts, fee based products, and a business built and based on trailer fees becomes a reality of the investment industry.
Dealerships should focus efforts on helping the advisors build solid, growing practices, that is asset based, and not only commission driven. That way, the advisor is focused on building the book of business, that eventually will provide either access to more sales (because of satisfied clients) and/or will be a source of steady income when some of the products that offer trailers are part of the book of business. Just like in the IIROC world, a bigger and more diversified book of business is better for the advisor and ultimately the dealership.
With the continuous talks about the fee based (or trailer based) model for the investment products (similar to the one we have in Australia) for both IIROC and the MFDA firms, the same might apply in the not so distant future to the EMD world. IIROC firms realized that some time ago, and with their much lower payout structure (below 50/50 in many cases) only a sizeable book of business guarantees their survival.
When Advisors are joining, or staying with, a dealership it is more and more important to have a support system. Not only related to the processing of paperwork, but mainly focused on training and development (right now in many cases only compliance training and product knowledge are being offered) as well as marketing support and business building efforts.
Many IIROC firms are, for example, now offering professional business coaching to help not only with the building process, but also with the organization of business and maintenance of the individual office environment. Most offer training that includes as a major component business building practices, and a development of the branding process.
Success of the industry has some essential components: First, productive advisors, offering products that are not being promoted because of the attractive commissions from Issuers. Second, dealerships realizing the importance the growth of the book of business by each and every advisor registered with them. Third, Issuers supporting both above mentioned parties in their business building initiatives. These three factors will guarantee that the development of the industry, regardless of the shape it will take, is safe in terms of the compliance perspective, profitable for all the parties involved.