Investment Dealers and Financial Intermediation Explained

Claire Montrose

Hey everyone—welcome back to Clear with Claire. I’m Claire Montrose, your study buddy and your friendly neighbourhood explainer of things the CSC sometimes makes unnecessarily complicated. If you caught the last episode, we took a big-picture look at how the whole Canadian securities industry works together, like this… sprawling, but surprisingly well-oiled machine, to get capital from savers to borrowers. Today we’re zeroing in on the investment dealers—who they are, what they do, and why, if you’re a company, you probably can’t just stroll into the TSX and list your shares like it’s a garage sale.

Claire Montrose

So let’s start with the basics: what actually is an investment dealer? In the wild, the term covers any financial company that acts as an intermediary, moving funds between the people who have money (think: individual investors, mutual funds, pension funds) and the people who need money (that’s companies and governments and, occasionally, fellow financial institutions). The dealer’s job is to make sure those transactions actually happen, and happen efficiently—which seems straightforward, but, in reality, it’s a pretty sophisticated orchestration.

Claire Montrose

Now, investment dealers wear two hats. The first is helping companies and governments raise new money in what we call the primary market. Let’s say a biotech startup wants to go public—that is, do an initial public offering, or IPO. The investment dealer will underwrite the share issuance (that means, they essentially buy the shares from the company and promise to sell them to investors). They figure out things like how many shares, at what price, and to whom, and they coordinate the regulatory filings and big investor roadshows. Actually, at one point, back when I was doing compliance automation work for a regtech startup, we built tools to help automate prospectus filings—because, believe me, nobody wants to fill those out by hand.

Claire Montrose

The dealer’s other main job is in the secondary market—facilitating the buying and selling of already-issued securities. They match buyers and sellers, make markets in specific stocks or bonds, and provide liquidity, which basically means you can sell your shares even if there isn’t an immediate buyer—because the investment dealer is, for all intents and purposes, standing by to take the other side of trades.

Claire Montrose

So in both roles—the IPO side and the stock-trading side—investment dealers are essential to keeping capital, and opportunity, flowing through the system. Without them, coordinating thousands of investors and issuers would be… basically impossible. And a quick tying thread to last episode: if you remember, we talked about how primary markets are all about raising new capital, while secondary markets are about trading existing stuff. Dealers are the through-line connecting both.

Claire Montrose

So now that we’ve got the “what” covered, let’s talk about the “who.” Not all dealers are created equal—there are actually three categories you need to know for the CSC: retail, institutional, and integrated. These sound a bit business-school-y, but the differences really do matter.

Claire Montrose

Retail firms—these are the ones most of us interact with as everyday investors. This includes full-service investment dealers (think: your classic “wealth management” shop, where you get a human giving you advice), and discount or self-directed brokers (like the big-bank online trading platforms). With full-service, you’re basically paying for expertise and a long-term relationship. The discount side is, well, cheaper, but they don’t provide investment advice—they just execute your trades.

Claire Montrose

Next up are institutional firms. These folks work exclusively with really big clients—pension funds, mutual funds, giant money managers—basically, organizations that trade in huge volumes. Sometimes, foreign firms even make up a solid fraction of the institutional dealer space here in Canada. They’re less visible, but they move big blocks of capital around.

Claire Montrose

Integrated firms are your “one-stop shops.” These are the big bank-owned dealers that do everything: full retail service, lots of institutional trading, underwriting, you name it. They’re players in both the primary and secondary markets, and handle the complete spread of government and corporate deals. If you think of the Canadian Big Six banks, you’ll find their investment dealer arms are almost always classic integrated firms.

Claire Montrose

But a category alone doesn’t tell you much about how these places actually function day-to-day. That’s where internal firm organization comes in. A classic integrated (or just big) dealer will divide themselves into—wait for it—front office, middle office, and back office. The front office is what everyone pictures: sales, trading, portfolio management, and all the “high energy” deal-making. Here’s something you learn quickly if you work in the industry: most of a dealer’s revenue comes from sales and trading, and front office is the shining star (and usually, the largest department). But—and this is big—the middle office and back office quietly make sure the whole thing runs without crashing and burning.

Claire Montrose

In the middle office, you’ll find compliance folks, risk analysts, accountants, auditors, lawyers—these are the people making sure nothing illegal is going on, trades are being recorded properly, and every box is ticked for the regulators. Back when I was consulting for fintech startups, I’d sometimes spend all morning in a front-office meeting talking about sales strategies, and then race to a middle-office compliance huddle because someone needed clarification on a new AML rule. Honestly, the middle office isn’t as “glamorous,” but it’s absolutely critical. Mess up on compliance or risk, and the regulators will—not to overstate it—make your life unpleasant.

Claire Montrose

And then there’s the back office: the superheroes of settlement, clearing, record-keeping, and making sure trades actually complete. You’ll never see them quoted in the Financial Post, but your ETF purchase going through smoothly? Thank the back office for that.

Claire Montrose

Okay, let’s tie this all together by talking about what investment dealers actually accomplish in the big picture—how do they channel funds through the system, and what does it mean to act as “principal” or “agent?”

Claire Montrose

At its core, channeling funds is all about getting money from investors to the people who need it, in the most efficient way possible. Sometimes this means collecting funds from investors willing to buy, say, new shares or bonds, and then allocating those funds directly to users (like companies or governments) through underwriting. That’s a big capital-raising event—think of the Bank of Canada doing a government bond auction, or a corporation selling a new issue in a negotiated deal.

Claire Montrose

But on a more routine basis, investment dealers channel funds through dealer markets, or by acting as agent in so-called “agented” buy/sell activities. This is where the principal versus agency distinction becomes really important. When a dealer acts as principal, they’re using their own capital—they’re buying inventory, underwriting a security issue, or trading from their own account. Underwriting is classic principal behaviour: you buy the securities as the dealer, and then resell to investors, hoping you make a profit (and yes, occasionally, a loss). In the secondary market, principal trading also happens when a dealer holds a position in inventory, ready to sell to investors or snap up an offer.

Claire Montrose

Agency, on the other hand, is about the dealer matching buyers and sellers—they never actually own the securities. They’re the facilitator, not the risk-taker. They earn money from commissions, not from holding inventory. So, when a retail advisor executes your trade and doesn’t use firm inventory, that’s an agency transaction. The principal is you, the client; the dealer is just the agent.

Claire Montrose

Now, real-world example time, because I always find the CSC gets abstract right about here. Recently, Scotiabank partnered to set up Cedar Leaf Capital, which will be the first Indigenous-owned investment dealer in Canada. The goal is to use the investment dealer model to increase Indigenous communities’ participation in the capital markets—acting as an agent for institutional clients and helping bring new voices and investors into the market. Once it’s up and running, Cedar Leaf will both sell investment products to institutional clients, and help Indigenous and broader communities access capital for infrastructure projects and more. This shows the potential for investment dealers to help expand access—when they act as agents, they’re literally opening the doors for new participants and making markets more inclusive.

Claire Montrose

In sum: investment dealers are everywhere behind the scenes of Canada’s financial system. Whether they’re risk-taking principals, protective agents, sales-driven front office, or quietly indispensable back office, they’re the highways connecting savings to investment, and new ideas to the funds that make them happen. And as you prep for the CSC exam, remember: understanding these interconnections isn’t just a checkbox—it’s what financial services is all about. If you want a challenge, try looking at the news this week—pick any capital-raising announcement or market transaction, and try to spot the dealer role. Odds are, you’ll see echoes of everything we’ve talked about today.

Claire Montrose

That’s all for this episode. Next time, we’ll get into the differences between financial intermediaries—like banks, credit unions, trusts, and insurers—and how they all fit into the big mosaic. Until then, study smart, rest up, and if prospectus filings haunt your dreams, know you’re not alone!