RBC / PH&N merger: What it means for clients

By Mark Noble | February 22, 2008 | Last updated on February 22, 2008
5 min read

Obtaining more business from the advisor channel is one of the driving forces behind the newly merged RBC Asset Management and Phillips, Hager & North, according to the two men behind the deal.

On Thursday, RBC announced it would acquire PH&N by offering shareholders 27 million RBC common shares. The combined firm will manage more than $160 billion in assets — $101 billion of which will be in mutual funds — putting the country’s second largest mutual fund company just a hair behind IGM Financial.

While the vast majority (81%) of PH&N’s $69.2 billion in managed assets are institutional, the company’s merger with RBC provides a lucrative opportunity to greatly increase the amount of retail money it manages. PH&N has been around for a long time, but its retail funds are primarily sold directly to the consumer. It will not raise the fees for these funds. However, it did recently introduce a B-class version of its funds with a trailer commission to attract more advisors’ business.

In a conference call with Advisor.ca, George Lewis, RBC’s head of wealth management, and John Montalbano, president of PH&N and the new CEO of RBC Asset Management, both emphasized they hope to grow the B-class side of the business.

“What this deal will allow us to do is to broaden access to the Phillips, Hager & North funds through our existing wholesaler team. That is something that will provide greater access to those who don’t have access to RBC Asset Management or PH&N funds,” Lewis says. “We have no plans or any intention of raising our direct-to-consumer fund fees; we are going to be looking at aligning the value that both firms recognize for the value of advice. That is something we will consider [changing] over time.”

Montalbano stressed that there would be no change to the way the company does business with advisors already selling PH&N funds.

“For the advisors that have been dealing with PH&N, it will be business as usual. They will be speaking and dealing with the same people,” he says.

Montalbano and Lewis also reiterated that the two businesses will remain completely separate and there will be no changes or streamlining of either fund offerings or management teams.

This is something David O’Leary, manager of fund analysis with Morningstar Canada, says is imperative to the combined firm’s success.

“I think it’s fair to say we like PH&N’s fund lineup better than RBC’s. We have more of PH&N’s funds on our recommended list of funds. We believe PH&N is a very strong shop, so it’s a great move for RBC to acquire them,” he says. “One of our big concerns was whether there was going to be a turnover in either side as a result of the deal. Fortunately, the [stock] purchase price is tied up for three years and is dependent on meeting certain performance targets, so that sort of keeps people around.”

In addition, Montalbano says that all of PH&N’s senior talent have signed five-year non-compete agreements. Both Montalbano and Lewis insist that for now their fund offerings will also remain consistent. For instance, PH&N, which O’Leary says is arguably the best fixed-income shop in Canada, will not take over RBC’s offerings in the same category.

There will be no dramatic changes to the management of the funds because there are already existing styles and investment processes that work for both organizations. “If anything, there is a greater opportunity to provide exceptionally good value in terms of fund management and also diversification for our clients,” Montalbano says. “What we would hope to do over time, when it makes sense for our respective clients, is to bring in the best of both worlds slowly into those portfolios.”

On the fixed-income side, for example, Montalbano says he could see PH&N drawing on some of RBC’s more experienced expertise in fixed-income segments, like high U.S. credit and high-yield bonds.

“[In fixed income] a lot of our strengths complement RBC Asset Management’s team, particularly some of our risk management systems we have in place. At RBC Asset Management, some the key strengths they have are U.S. credit and high-yield global bond and emerging market debt, as well as foreign exchange management,” he says.

“PH&N managers such as Hanif Mamdani and Scott Lamont will continue to manage the PH&N funds, and all of their time will be fully dedicated to managing those funds, not thinking about merged desks. They will not be distracted by such things. They will [only] be asked when they think it’s the right time to start using U.S. credit, global bond or emerging market debt.”

This complementary process will also be continued on equities, including keeping relationships with some of PH&N’s sub-advisor firms like Sky Investment Counsel and BonaVista Asset Management. Montalbano says it will only benefit clients to have a broader choice of successful investment mandates, regardless of whether they invest in the same universe.

On the institutional side, RBC does have a spotty record on acquiring private money managers like Connor Clark and Royal Trust. For example, in the past, it couldn’t integrate Royal Trust’s institutional business into its model and opted to sell it instead. George Lewis says this time it’s different — RBC’s institutional business has evolved, and it has a great investment culture compatible with PH&N.

“While I wasn’t directly involved with acquiring either one of those businesses, the Connor Clark acquisition was more focused with the higher-net-worth client area. That is a business that has now grown to a very large size for us. Combined with Phillips, Hager & North, we are now the number one private client business in Canada,” he says. “RT Capital was an institutional-focused firm, and we sold that business in 2001 for a couple of reasons. One is at the time we felt that we did not have internally the type of global capabilities that were required to serve the institutional market. More fundamentally, we were also bringing our different asset management businesses together at the time to form RBC Asset Management within RBC.”

Lewis adds, “We had five or six different companies at the time, and really the investment process and culture of RT Capital was very different from the rest of our team. In our view, things have changed in the institutional market that are quite encouraging.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com


Mark Noble