Bank of Nova Scotia, the laggard among the banks in the lucrative Canadian wealth-management business, is attempting to close the gap between itself and its competitors. The Toronto-based bank is bringing its three domestic asset-management businesses — mutual fund arm Scotia Securities Inc., brokerage firm ScotiaMcLeod Inc. and private-client money manager Cassels Investment Counsel Ltd. — under a single umbrella called Scotia Asset Management LP.

The unified structure will allow for greater efficiency and economies of scale, and result in a co-ordinated approach in such areas as product development, advisor and client communications, and brand promotion. Scotiabank hopes the reorganization will put the bank on stronger footing to expand its wealth-management business internally, as well as to assimilate any acquisitions it may make in the future.

“We are currently leading the industry, in terms of our rate of asset growth, and we are looking to accelerate,” says Glen Gowland, president and CEO of Scotia Asset Management. “The reorganization will allow us to take the areas in which we’ve invested, such as product innovation and sales support, and move them closer together. At the same time, we can leverage the strengths we have on the brokerage and private-client side.”

Analyst Brad Smith of Blackmont Capital Inc. in Toronto says the move will increase the reach of John Varao, newly appointed chief investment officer of the new Scotia Asset Management, whose team had previously been housed in the Cassels private-client division.

GROWTH OPPORTUNITY

“Varao and his team have clearly impressed the bank,” Smith says. “Management would like his input on product development and investment management to supersede the Cassels position he originally held. The bank has concluded that it has good management resources in several areas that have been landlocked under the previous organizational structure.”

All the Big Five banks have identified wealth management as a high-potential growth opportunity, but Scotiabank has not been as successful as its competitors in capturing assets. According to the Investment Funds Institute of Canada, as of Aug. 31, Scotiabank’s mutual fund assets stood at about $20 billion, dwarfed by industry leader RBC Asset Management Inc. s $102 billion and TD Asset Management Inc.’ s $52 billion.

However, Scotiabank has been steadily gaining market share. During the past two years, its share of fund industry assets has risen to 3.9% from 3.3%, according to IFIC figures, and that share has increased in all but one of the past 30 months.

Recently, Scotiabank’s net fund sales have been leading the industry. For the year ended Aug. 31, Scotiabank had net fund sales of $1.6 billion, which accounted for 71% of the $2.8 billion in net fund sales raked in by the top five Canadian banks. Scotiabank has not suffered the huge redemptions in money market funds faced by some of its competitors this year, says IFIC analyst Dennis Yanchus, as the bank originally received a smaller share of those assets when money market funds were hot.

“Now that it has restructured, Scotiabank can focus on organic growth as well as acquisitions,” says Dan Hallett, industry analyst and president of Windsor, Ont.-based Dan Hallett & Associates Inc. “Instead of having different business units doing similar work, the bank can take advantage of its intellectual capital and create a stronger brand identity by having smart people with similar functions working together.”

Although Scotiabank’s immediate step is to rationalize internally and take advantage of the consequent synergies, it will also be putting itself in a better position to digest or merge with any assets that may be acquired in the future. The bank swooped in about a year ago to acquire Sun Life Financial Inc.’ s 37.6% stake in CI Financial Inc. (both Toronto-based) for $2.3 billion in the wake of the stock market meltdown. A year earlier, the bank had purchased 20% of DundeeWealth Inc. of Toronto, as well as all of subsidiary Dundee Bank of Canada Inc. for a combined $608 million after Dundee Bank ran into funding problems in the wake of the meltdown in the asset-backed commercial paper market.

POSSIBLE ACQUISITIONS

There is speculation on the Street that Scotiabank is getting its house in order before proceeding with acquisitions such as the remaining shares of CI or, eventually, DundeeWealth.

DundeeWealth is firmly controlled by Dundee Corp. of Toronto and could not be acquired unless Dundee, controlled by founder Ned Goodman and his family, was a willing seller. However, Scotiabank has the right of first refusal should Dundee decide to sell its shares.

@page_break@CI, on the other hand, is broadly held in public hands. With $60 billion in assets under management, the acquisition of CI could vault Scotiabank into the big leagues of the Canadian wealth-management industry.

“We want to create a strong organic growth platform,” Gowland says, “but we will also pursue any acquisition opportunity that makes sense. Consolidation is certainly a theme in the industry, and we are open to opportunities.”

An examination of the Canadian fund industry, he adds, shows only a handful of companies with strong net sales and a growth profile.

Meanwhile, the newly formed Scotia Asset Management will continue to strengthen its foothold in wealth management by offering its products through the branch network as well as through the independent advisor channel. Since the introduction in the past 18 months of F-class funds for fee-based advisors, as well as advisor-class funds with a choice of commission structures (including low-load and deferred sales charge options), Gowland says, the market share of Scotia funds through the independent channel has picked up speed.

Scotia will continue to invest in new product development as well as sales support, advisor education and what Gowland calls “competitive intelligence, [which] gives us a framework to identify how we fit into the industry, how our product shelf compares to others, and where there are opportunities for growth relative to our banking industry peers and other asset-management firms.” IE