Wednesday-Night Mag
TSE, Me on Periphery?: Continent could turn into one huge trading floor
Robert Gibbens
Financial Post
MONTREAL - Canadian stock exchanges are moving inexorably toward a single North American securities trading system that will compete head-to-head with a similar network in Europe, the heads of Canada's two leading stock exchanges said yesterday.
"To fit into these continental market systems, Canada has to have international-calibre products and provide the world with full access to our own markets or we won't survive," said John Carson, senior vice-president of the Toronto Stock Exchange.
Regional exchanges will retain a role within the continental network, according to Gerald Lacoste, president of the Montreal Exchange.
"We want to form partnerships and open up our own markets so they mesh with the centre and we can position ourselves for a real say at the table," Mr. Lacoste said.
However, he implied that all exchanges outside the central one will be peripheral.
"We see a role for the peripheral exchanges in North America and Europe as well, if their technology is tops, they specialize, and cut trading costs."
Richard Grasso, the New York Stock Exchange's president, told an international conference here on Tuesday that the Canadian restructuring will create an "electronic bridge" with U.S. trading platforms, to the benefit of institutional and retail traders.
"We also look forward to the day when all NAFTA countries are interlinked for trading, including Chile," Mr. Grasso said. "Consolidation among stock exchanges everywhere will continue."
Messrs. Carson and Lacoste made their remarks yesterday before the Quebec Securities Commission hearings on the restructuring plan.
The march toward centralized continental trading systems is the true backdrop to the current Canadian securities exchanges restructuring plan, Mr. Carson said.
Under the plan, the Toronto Stock Exchange will assume all trading in senior stocks, while Montreal will handle derivatives trading. A single Western exchange, based in Calgary and with operations in Vancouver, will handle junior equities trading.
"We're struggling constantly to keep up with fast-moving world events as technology, globalization and political forces shape the securities industry's future," Mr. Carson said.
Mr. Carson painted a stark picture of a Canadian trading system that risks being left behind as other jurisdictions increasingly computerize and centralize their trading systems. In addition, traditional stock exchanges face growing competition from online systems that bypass the old exchanges altogether.
"We're trying to position ourselves for the future and we've got to invest to keep up," Mr. Carson said. "Nasdaq has just spent about $600-million (US) upgrading its systems. We don't have their volume but we're talking big bucks in Canada, too.
"In these giant electronic world markets, brokers will soon operate with two high-speed screens, compared with six today. We're up against the growing force of upstairs [off-floor] block trading by institutions and many other channels."
The TSE and ME executives, along with Michael Johnson, Vancouver Stock Exchange president, fielded questions from QSC chairman Jean Martel and several commissioners, who were concerned about jurisdictional and other issues in the Canadian restructuring plan.
The QSC is to send an opinion on the plan to Bernard Landry, Quebec Finance Minister, late this month. He is due to make a decision in September on whether the plan will go ahead.
Critics of the restructuring predict a jurisdictional quagmire. But Messrs. Carson, Lacoste and Johnson said provincial securities commissions are quietly trying to find a model to ensure that each has a continuing role and that there's little overlap.
The new national junior equities market will have five regional offices, providing most of the same services that issuers already have. Appeals will be heard regionally.
The exchange heads said the regional offices will have enough policy-making clout to influence Toronto and Calgary.
They stressed that a separate Quebec small-capitalization exchange is not needed because the proposed national junior exchange can provide superior liquidity and lower trading costs.
There have been calls in Quebec for the province to retain its own independent junior exchange.
Saturday, June 05, 1999
A new pay day
Traditional commission-paid brokers are giving way to wealth managers and high-tech, low-cost traders
Katherine Macklem
John Lehmann, National Post / Sam Cukierman answered the call of Canadian Imperial Bank of Commerce to lead the marketing of its wealth management division.
When Sandra Kamstra learned that Charles Schwab Co. was moving north to Canada, she -- along with hundreds of other investment professionals -- dusted off her resume and asked for a job. Now a recruit at Canada's newest brokerage firm, she says she wanted to make the move because "it was clear the industry was going in the direction that Charles Schwab is leading."
Sam Cukierman was working as a consultant when Canadian Imperial Bank of Commerce called, asking him to lead the marketing effort at the bank's wealth management division. He came back to what he calls the "corporate rat race" because, he says, the rapidly expanding wealth management business offered an opportunity to "create excitement in the marketplace."
The two probably have never met. But they are both part of a trend that is exerting enormous pressure on Canada's retail brokers. Once a quiet, discreet and rich service industry to the very wealthy, the brokerage business is in the midst of a massive and fundamental transformation that's being driven by technological innovations, new sources of competition and a smarter, better informed customer base.
"Everybody wants to eat everybody else's lunch," says Mr. Cukierman, senior vice-president of wealth management at CIBC. "The broker of yesterday has changed forever. The traditional brokerage model -- I just can't see it surviving."
As more and more Canadians invest their savings in the stock market -- as the pie gets larger -- the number of groups wanting a piece is multiplying. New technology means new entry points to the markets that are opening up faster and offering access that's easier than ever before.
The latest buzz word in financial services circles is wealth management, as banks, mutual fund companies, even credit card companies vie with the brokerages to manage the savings of Canadians.
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This past week, things became even more intense. On Tuesday, Merrill Lynch & Co., a stalwart, New York-based defender of the full-service business, said it will offer online service to its clients, a move that will likely force its traditional counterparts to jump aboard. Then, on Thursday, Schwab Canada announced a new online distribution system for initial public offerings, a move designed to give Schwab greater access to the underwriting business and to give investors an online gateway to initial offerings.
At stake, of course, is money -- both for the investment firms and for the brokers who work there.
For Ms. Kamstra, the key difference between her new employer and the former one, Merrill Lynch Canada, is the way she is paid. At Merrill, like virtually every other investment house in Canada, investment advisors are paid on a commission basis, meaning they earn income whenever they make a transaction on behalf of clients. Schwab, on the other hand, pays its advisors a salary, plus a bonus tied to both portfolio performance and customer satisfaction. (Schwab clients will be polled, the company says.)
"The fact that brokers are paid commissions is a huge, huge apparent problem in our industry. It really puts a lot of pressure on the side of the broker," Ms. Kamstra says. "Eliminating the conflict of interest is absolutely key in a relationship," she adds.
Steven Hart, recently hired away from Nesbitt Burns by Schwab, says the pay package is the key reason for the move. Now when he calls a client, he knows the client isn't asking himself: "Does Steve have to make rent, or is this really the right thing that I should be doing?"
"In the old environment, I knew that that was a thought of the client. So whenever you made a call, you almost felt, in a way, dirty," Mr. Hart says.
Even though Mr. Hart and Ms. Kamstra may make less money in their new jobs, they both say they expect the industry will eventually follow suit, and they want to be ahead of the pack. "We're never going to have the stellar month," says Ms. Kamstra. "But we're also never going to have the very poor month either."
The resistance to a new compensation model for paying investment advisors is powerful at the traditional brokerages.
"I've been successful -- I don't think you can call it luck anymore -- in identifying undervalued companies. Professionals like myself, we are there to serve people who are busy doing something else. We work very hard and we want to be compensated for that," says an investment advisor at Nesbitt Burns, who asked not to be named. There is not a conflict with commission-based pay, he adds.
Pressure on the brokerages to change is also coming from the banks -- ironic given that the large firms are owned by the banks. At CIBC branches across Canada, a small army of certified financial planning investment specialists -- who are paid a salary, plus a bonus -- sell investment products, says Mr. Cukierman.
"We have financial advisors and certified financial planners or investment specialists in our branches who are able to give customers the kind of help we've never been able to do before," Mr. Cukierman says. "Branches are still a bank's main channel of distribution. We also now are starting to sell our products through brokers and planners."
Until recently, the bank-owned brokerages have operated quite independently from their bank owners, but that too is changing, as the banks are pulling their retail brokerage operations in under the wealth management umbrella. Already there are the mutual fund salespeople, the bank-owned discount brokerages and many of the bank branch staff, formerly known as tellers, who now sell all sorts of investment products.
RBC Dominion Securities, owned by Royal Bank of Canada, is one of the oldest and most powerful brokerage firms in the country. It now offers fee-based accounts, Steve Mantle, the broker's vice-president and director, wealth management, told a recent Strategy Institute conference. But that doesn't mean changing the traditional brokerage system, Mr. Mantle said. "Let's not throw the baby out with the bathwater. Instead, let's level the playing field."
The commission-paid investment advisor at Nesbitt is not impressed. "The new people who come into the business are encouraged to become what I call 'glorified tellers,'" he says. "These people are busily running around trying to get the assets in."
And, they are still paid on a commission basis -- a key difference from the Schwab experience, says another observer. While customers pay a fee, for example, for an RSP account, the advisor who set up the account is paid a portion of that fee. The Nesbitt advisor says this business is less profitable to the firm than commissions. However, it provides a much more stable and predictable income. "It's understandable since the Bre-X scandal, the bank sees no benefit to exposing itself to risk. If you sell mutual funds and packaged products, chances of you screwing up are much less than if you get involved with individual stocks."
Mr. Cukierman says brokers of the future will find themselves either in boutique operations, catering to the very wealthy, or in mid-tier businesses that offer clients a combination of electronic or telephone trading, and advice from an advisor. "The brokers are really in a free-for-all for the wealth management customer's business," he says. "You must change to survive or die."
So far, most of the challenge to the traditional brokers has come from the side of the business that sells investment products to customers. But with Schwab launching an online site for initial public offerings, it is taking aim at the underwriting side of the brokerage business.
"The traditional underwriting business is going to change -- very much so," says Paul Bates, president of Schwab Canada. To date, an online initial offering has been an unusual event, but it will become more mainstream, he says. "In the long run, you're going to see this as a normal part of the new issue process, just as online trading in the secondary market is a normal part of the daily life in the brokerage industry today."
For a small player, Schwab Canada has the potential to have a lot of influence on the way things are done on Bay Street. And Ms. Kamstra, even though she may have accepted a pay cut for this year, may end up right out in front of the pack.
