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If investment advisers disappear, how will companies raise money?

Many Canadian corporations rely on retail investors to buy shares whenever they finance, and investment advisers usually serve as the intermediary between them and the individual buyers.

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As Canadians debate the role investment advisers should play in managing their money, there is one argument that continues to get overlooked: The help they provide to companies who need to finance.

With the wealth management business under siege, as regulators crack down on fees and low-cost funds hurt total revenues, there is a cloudy future for investment advisers. The industry's evolution is raising questions about the effects on individual investors and what type of advice they are able to get.

What is often overshadowed by these two important groups is a third, but equally important, party: Canadian corporations. Many rely on retail investors to buy shares whenever they finance, and investment advisers usually serve as the intermediary between them and the individual buyers.

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Without advisers, or with fewer of them, it's possible there will be less demand for new share issues – something that worries Bay Street bankers, but rarely catches the broader public's attention.

The fear has been building for years because their pay model is rapidly changing. Many still earn per-trade commissions, so they are rewarded every time they buy and sell shares in their clients' accounts. Brokers are also incentivized to help sell new share issues.

Whenever there's a new stock offering by a company such as Suncor Energy Ltd. or Barrick Gold Corp., the issuer pays a fee to the investment bank that underwrites the sale – often around 4 per cent of the deal's value. Retail advisers who buy these shares for their clients typically get half of the fee for helping to sell the issue – arguably easy money for simply putting stock in a client's account.

This compensation model is quickly growing outdated. Fee-based accounts, where advisers earn a flat annual fee, often worth 1 or 1.5 per cent of the assets under their management, are becoming the norm. This model is widely seen as better aligning advisers with their clients, because there are no incentives for the advisers to buy and sell stocks simply to generate sales commissions.

RBC Dominion Securities Inc., Canada's largest employer of full service retail advisers, started pushing this model more than a decade ago and today more than 60 per cent of total assets under its watch are in fee-based accounts. Smaller rivals are now quickly following suit, so even if advisers make it through the current industry storm, the way they are paid could look much different.

All of this could cause problems for Canadian companies looking to raise funds – such as energy producers, many of whom have sold multi-billion-dollar share offerings in the past 18 months. Without the help of retail advisers, some of their deals may not have sold, which means they would have had a harder time paying back debt.

The issue, though, isn't black and white. "I spent my entire career as an investment banker," explains Paul Allison, who runs Raymond James Canada, one of the country's largest independent adviser networks. "I think [the fear's] a little bit overblown."

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"I struggle to understand the argument that there are companies being starved out there from a capital perspective" because of the fee-based model, he added. If a new issue is good for a client, advisers are "going to do it whether they get the commission or not."

And from a policy perspective, it's just good business. "If the new issue commission is in and of itself the only motivation [for the retail adviser], it's the wrong motivation," Mr. Allison added.

Considering he's spent so many years in capital markets, his argument is an important counter to the common concern about this shift on Bay Street. However, the issue has only become more relevant as the disruption plays out, which means regulators will need to watch when weighing the policy options.

The last thing they should want is to make it next to impossible for the next great Canadian company to get the financing it needs.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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