The Globe and Mail, Report on Business
Published February 23, 2008

It appeared on my BlackBerry screen on Thursday afternoon. Word from the office that Royal Bank was buying Phillips Hager & North.

My first reaction was to shrug and say "this type of rumour goes around once a year."

After I had a moment to read the complete e-mail and absorb the news fully, I thought, "Wow, they did it."

With further reflection, I became acutely aware of my conflicting emotions - sadness, fascination and excitement. The emotions relate to the three hats I wear on this announcement. Sadness stems from my role as the former president of PH&N. Fascination relates to my intense interest in asset management and my tenuous job as an industry commentator in The Globe and Mail. And the excitement comes from my current station in life, that of president at Steadyhand Investment Funds, a microscopic competitor to PH&N.

Shortly after the announcement, my phone lit up with people wanting a comment from a former insider. I declined. I needed time to think this one through and sort out my mixed emotions.

Below are some thoughts on the deal from a highly conflicted observer.

I should say at this point that I had no inside information on the deal and own no shares in either company. I have friends on both sides of the transaction, but I didn't hear a word. It does explain, I guess, why a few people have been avoiding me lately. I thought it was something I had said.

First of all, I do think it's a sad day for the Canadian asset management industry. PH&N has been a firm that showed us that it could be done differently. That fees didn't need to be high to deliver a good product. That client interests came first. PH&N was a breath of fresh air in an industry dominated by large institutions focused on asset gathering as opposed to investment management.

It's sad because that is going to change. But perhaps it already has. Last year PH&N ramped up its efforts to sell funds to Canada's financial advisers. It introduced a series of funds that paid trailer fees and had higher MERs. It was already starting to look like any other investment company and not the one that passionate PH&N clients knew and loved.

I'm not sad because I think RBC is going to raise fees or get out of the direct-to-client business. That's the most valuable part of what the bank is buying. They might even lower the fees.

But I do think that PH&N will lose some of the character that made it so special to so many people. For starters, PH&N employees felt like they worked for a different type of company.

They weren't in a call centre in New Brunswick with hundreds of people around them. In reality, a lot of PH&N employees and clients are bank refugees. No matter how good management is, it won't be able to maintain the character that Bob Hager and the early partners infused into the company. As their competitors will no doubt point out, this is an investment firm that screamed from the roof tops that it was not a bank, that it was employee owned and proud of it.

My fascination is about what is going to happen after the deal closes in April. It is likely that PH&N will shrink a little over the next year or so. It will be tough to add new clients through this period of uncertainty and existing clients that are on the bubble will use the bank ownership as an excuse to take their money elsewhere. There is no doubt that some institutional and individual clients will feel disaffected by the ownership change.

But the bankers at RBC are good operators. Indeed, it was one of the reasons this deal went through. The PH&N partners felt comfortable working with the RBC team.

Brenda Vince, who will be responsible for merging the PH&N private client business into the bank, has done a fabulous job with Royal Mutual Funds. No less an observer than Bill Holland of CI Financial has acknowledged that the Royal has executed perfectly. It will be interesting to see what she does with PH&N's gem, the direct-to-client mutual fund business.

Dan Chornous, chief investment officer for RBC Asset Management, has made Brenda's job a lot easier by giving her team good performance numbers to work with. He will be a positive influence on the equity department of PH&N, which has struggled in recent years.

I'm curious to see how PH&N's institutional division, which is a leader in serving insurance, pension and endowment clients, will fare under the RBC banner.

Outside of index funds, where Toronto-Dominion Bank has been successful, I don't think the banks are a fit with this type of business and, at one point, RBC felt the same way.

It sold RT Capital, its previous pension management arm, to UBS in the 90s with the comment that they would never be able to grow it to be a meaningful part of the bank.

Finally, I am excited because the disappearance of an independent PH&N leaves a vacuum for the smaller, non-bank asset managers to fill. The granddaddy is passing on the baton.