Brendan Wood Investor Services Commission Allocation Guidance 2024/2025
Anatomy of the Future Canadian Commission Dollar
New York, NY, December 19th, 2023
Big ticket Canadian investors continue to globalize their equity portfolios. This trend diminishes the domestic Canadian commission pool for coverage of Canada stocks.
Composition of Canadian Institutional Portfolios:
US Stocks 48% of Equity AUM
Canada Stocks 37% of Equity AUM
Other Foreign Stocks 15% of Equity AUM
In 2024, Canadian investment dealers will face increasing pressure to further expand their research, sales and trading coverage to encompass more US and other foreign institutional clients who buy Canada stocks. Some Canadian broker dealers have adapted to the trend better than others. For example, industry leading RBC fields the most successful Canada stock coverage in the US and benefits from the largest market share awarded by US investors for Canadian stock coverage, more than double the average of the other 5 Canadian big banks. BMO, CIBC, Scotia and lately TD have some presence in the US as well as covering US investors on Canada stocks from Canada. Looking forward at 2024/2025, US investors buying Canadian stocks say RBC’s market share will continue to dominate. However, as Canadian investors increase their US and other foreign holdings, the bigger long-term challenge confronting Canadian dealers is the increasing foothold of US broker dealers amongst Canadian institutions, who need high quality US and global sector stock coverage, which they primarily rely on from US broker dealers. RBC has best anticipated the need to integrate US and foreign stock coverage with its Canadian equity services. Based on market share RBC’s Canada strategy stands out.
What about Canadian boutiques and speciality firms? There are several successful speciality firms, such as Eight Capital, Raymond James, Stifel Canada, formerly GMP, and Cormark Securities. Raymond James and Stifel also provide coverage of US stocks. A notable speciality firm is Canadian TopGun independent, energy dealer and investment bank Peters & Co. Limited. Big Ticket investors accredit the exceptional qualities of Peters & Co. coverage of Canada’s energy industry. Investors cite the unique culture of the Peters & Co. partnership, which breeds quality from within. Once again, in its six decades, Peters & Co. currently fields a new generation of professionals who show every sign of client service equivalent to its predecessors.
According to US, European and Canadian institutional investors, the Peters & Co. team delivers the highest quality research and sales coverage of Canadian Oil & Gas equities. Peters & Co. has consistently led the Canadian Oil & Gas industry in frequency of high value personal coverage, quality & creativity of content and commission impact. North American investors have the highest level of trust in the Peters & Co. team going forward. Even though Peters & Co. has ushered in the next generation of research analysts, clients say their quality is expected to remain at the highest level in the industry. The sales team continues to provide the leading Canadian Oil & Gas coverage to global investors. Investors cite the firm’s deep knowledge and corporate executive connections as the main factors of differentiation. One of its highlights is the Peters & Co. Energy Conference in Toronto.
“It seems inevitable that Canada’s bank dominated, domestic dealer community will feel compelled to grow into at least North American, if not global platforms. RBC is the most advanced by far, but several others have acquired and/or built out some form of US platform. How long before US dealers selectively add big cap Canada stocks to their global coverage platforms? They can certainly do so, at least selectively, but given the relatively modest commission revenues available for broad Canada stock coverage, large US broker dealers may not feel the need or see the advantage,” said Brendan Wood, Chairman. However, another trend is the rapidly increasing demand amongst Canada’s major issuers for US and other foreign shareholders. “Selective coverage of Canadian issuers seeking their full distribution potential in the global sector investing world is a wide open invitation to multi national broker dealers and their investment banking partners,” according to Mr. Wood.
On the buy-side of the global investment business, the search for sell-side talent, insight and ideas are constants. What portfolio manager is disinterested in sharing thoughts with a genius TopGun analyst or sales professional of extraordinary insight? However, the spending power of the commission dollar is easily diluted on the notion that investment wisdom or genius can be institutionalized. The dominant share of commissions is allocated to the largest broker dealers, but is that because the most creative professionals are housed in the larger brokerages? In many cases allocations to major firms are more easily made from a policy/compliance perspective but may not fully align the commission dollar with sell-side talent and service which make an influential difference to a portfolio manager’s performance. Do TopGun portfolio managers spend their commission dollars differently? Yes, somewhat but shopping for optimal talent is hard work and portfolio managers are busy people. Relationships with the sell-side consume time and energy. “Asset managers are keen to participate in the discovery exercise which identifies top quality investment talent on the sell-side, regardless of size. Being professional buyers at heart, TopGun portfolio managers want to make sure their spend is buying the best. The best is not necessarily the biggest by any means. For example, TD attracts more complaints than any of the major banks but still ranks 4th. Why? At least part of the answer is the awarding of commissions based upon size,” says the Brendan Wood study.
The results of Brendan Wood’s near 2000 global investor forecasting debriefs during 2023 underline the on-going importance investors attach to outstanding research and personal coverage. In particular, boutiques and/or specialty firms are essential to many investment niche markets, including those focused on Canada’s energy and resources sectors. However, Canada’s big banks, when focused on large cap stocks, can expect to encounter intense competition given their positions. Even world class RBC has faced replicating its outstanding Canadian market share in the tough US market. From a bank’s perspective, the research a bank delivers has a distinct influence on its corporate finance, M&A and retail wealth management franchises. As Brendan Wood’s global debriefs of clients attest, a bank’s investment brain trust matters across a spectrum of a bank’s businesses.
What Will Institutional Investors Pay For?
Research = 33%
Sales = 16%
Trading (Including Electrontic Trading) = 40%
Other = 11%
Forecast Global Commissions To Be Paid For Coverage of Canadian Stocks 2024:
Canada = +/- $457M CAD
US = +/- $327M CAD
Europe= +/- $150M CAD
Forecast US Commissions from US, European and Canadian Investors for Coverage of US Equities = +/- $7.79B
About Brendan Wood International:
Brendan Wood International (BWI), formed in 1970, is a private advisory group which originates performance investigation programs in the capital markets. Brendan Wood Partners debrief large institutional investors worldwide on a daily basis. There are 2000+ live consultations with professionals overseeing +/- $60 trillion invested in the +/- 1400 big cap companies on the BWI Index. Relying on its real time performance intelligence, BWI advises public companies, institutional and activist investors, investment banks and broker dealers on strategy, performance and recruitment of TopGun talent. The firm’s partners have formally presented at 1000+ C level strategy meetings and corporate off-sites in fifty cities. Brendan Wood founded the exclusive TopGun Club, a performance based institution. Brendan Wood International is the research provider and sub-advisor to the Brendan Wood TopGun ETF (Ticker: BWTG)
Disclaimer:
All reports, evaluations and assessments contained herein, represent Brendan Wood International’s subjective judgment and opinions, based on our years of experience and on information obtained by us in the course of our research. Much of the factual information contained in the reports has been obtained by us from third parties on whose responses we have relied in good faith, independent verification by Brendan Wood International being, under the circumstances, impossible. While we believe that you will find our reports to be an invaluable tool in formulating your own strategies and judgments, the foregoing should be borne in mind. This report is not meant as investment advice and should not be interpreted as advising on the value of a company’s securities, the advisability of investing in, purchasing or selling any company’s securities or any other conclusion relating to investment/divestiture of a company’s securities. Finally, this report is not intended as an offer or solicitation for the purchase or sale of any company’s securities.
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