Bank of Nova Scotia’s mission to build its wealth-management business continues unabated as the firm announced it has scooped up Toronto-based E*Trade Canada Securities Corp., the largest of the non-bank-owned Canadian discount brokerages.

“We do believe that this is a segment of the market that is growing,” says Barbara Mason, Scotiabank’s executive vice president of wealth management in Toronto. “We do want to invest more in it.”

The bank is buying E*Trade for $444 million, in an all-cash deal, from its New York-based parent, E*Trade Financial Corp. The shares of the U.S. parent have plummeted over the past year as a result of the credit crisis south of the border. With the acquisition, announced in mid-July and expected to close in the fall, Scotiabank inherits 125,000 active accounts, $4.7 billion in assets under administration and 190 employees.

Scotiabank, which already operates discount brokers ScotiaMcLeod Direct Investing and TradeFreedom Securities Inc., says that the deal, together with its current holdings, will give the bank the second-largest presence in the discount brokerage industry in Canada, in terms of total number of accounts and trading volume. It will be the third-largest, in terms of AUA. Scotiabank declined to disclose total figures.

The bank also says that the E*Trade acquisition will allow it both to strengthen its existing discount brokerage services and gain access to a large pool of new customers to whom it can cross-sell other services.

Analysts and observers appear to agree that the acquisition is positive for the bank. “We find it hard to argue with the logic of acquiring one of the few remaining wealth-management assets in the country,” says a TD Securities Inc. report commenting on the deal.

“Scotiabank clearly has shown, over the years, both an appetite for and ability to integrate companies into its environment,” says Paul Bates, dean of the DeGroote School of Business at McMaster University in Hamilton, Ont. Bates was president and CEO of discount brokerage Charles Schwab Canada before it was acquired by Scotiabank in 2002 and was merged with the bank’s existing discount brokerage. “E*Trade has built a great franchise in Canada,” he adds, “and I think it all fits very nicely with Scotiabank’s approach to doing business.”

E*Trade, known for its low commissions, strong technology platform and appeal to active traders, is the second discount broker Scotiabank has acquired in slightly more than a year. In June 2007, Scotiabank bought TradeFreedom, a firm that also targets the active trader segment.

“While active traders only represent 2% of online accounts, they account for 35% of the trade volume, with both of these metrics having doubled since 2005,” said Chris Hodgson, executive vice president and head of domestic personal banking for Scotiabank, in a conference call announcing the deal.

The discount brokerage industry is set to boom, Hodgson said, with sector AUA — which were estimated by Toronto-based research and consultancy firm Investor Economics Inc. to be $180 billion as of March 2008 — expected to double over the next eight years. “Online brokerage is playing an increasingly significant role in wealth management as more Canadians are using online investment solutions, and many are becoming more active traders,” he added. “This is a growing market.”

Scotiabank says that it intends — at least, for the time being — to run all three discount brokerage arms as separate entities. It hopes to take best practices from each platform and introduce them across its entire discount brokerage portfolio. “Each of the businesses has some unique features to their service offerings and their technology, and we don’t want to lose any of the value that has been developed in each of those,” says Cathy Welling, managing director of ScotiaMcLeod Direct Investing.

In announcing the deal, Scotiabank went to some lengths — including taking out full-page newspaper advertisements — to reassure E*Trade customers that Scotiabank wouldn’t be making any sudden changes to service. One of E*Trade’s biggest draws for its clients has been its low fees. “We know why E*Trade customers went to E*Trade [in the first place],” Mason says, “and we’re not going to toy with that.”

Nevertheless, Mason acknowledges that the bank does have a strategy for its discount brokerage portfolio, but it isn’t ready to reveal its cards yet. “It’s maybe a little early to tell, just from a competitive basis; we don’t want to disclose too much,” she says. “We certainly know where we’re going to take this.”

@page_break@One thing is certain: E*Trade will eventually undergo a name change. “We can use the [E*Trade] name for a period of time,” Welling says, “but there will be a transition at some point.”

Scotiabank is hoping it can, over time, woo E*Trade customers into using other bank products and services. “In many cases, [E*Trade customers] are holding accounts with some of our competitors, so we’ll be looking to consolidate the trading share of wallet. And in doing so, moving online banking and other products into our bank,” said Welling in the conference call. “We know they’re, obviously, online customers — that makes it a very low-cost way to introduce offers to them.”

Scotiabank also hopes that some of its new discount brokerage customers might, in time, decide to shift at least part of their assets to the full-service side of the business. “I do see that opportunity in the medium term,” Mason says.

The E*Trade deal is just the latest in a host of acquisitions and hires that Scotiabank has made over the past two years in an effort to boost its wealth-management business, which has long been a weak spot for the bank. “There are very distinct segments of the wealth-management space: those who want advice, those who want to trade online on their own and those who want to trade with assisted advice,” Mason says. “We’re looking to invest in all of those platforms.”

Scotiabank’s most significant recent move came last October, when it purchased an 18% stake in Toronto-based DundeeWealth Inc. after that firm ran into difficulties related to the asset-backed commercial paper crisis. Scotiabank also purchased Dundee Bank of Canada outright as part of the deal.

Scotiabank, in tandem with its “growth by acquisition” strategy, is also looking to increase its wealth-management business organically. The bank has been adding to its advisory force, Mason says, both at the branch level and at ScotiaMcLeod Inc., building its wholesale capabilities and investing in technology. It also made a number of personnel changes in key leadership positions.

Last year, Scotiabank hired a trio of veteran senior executives away from Royal Bank of Canada to bolster Scotiabank’s money-management subsidiary, Scotia Cassels Investment Counsel Ltd. Scotiabank also named a new head, Glen Gowland, for Scotia Securities Inc., the bank’s mutual fund arm.

“We’re really looking to accelerate the rate of growth in [our wealth-management] businesses,” Mason says. “And where there are acquisition opportunities, from a prudent investment perspective, we’re looking at everything that might come along.”

The growth strategy seems to be meeting with some success. Scotiabank says that its market-share numbers in its discount and full-service brokerage businesses, its private client unit and its mutual funds business are all trending upward. According to the Investment Funds Institute of Canada, Scotiabank’s mutual fund assets under management were $19.6 billion as of June 30, up 10.8% from last year, the second-biggest increase in mutual fund AUM among the Big Five banks.

“Overall, we are very pleased with the strong momentum in our wealth-management business,” said Scotiabank president and CEO Rick Waugh during the conference call. “This acquisition builds on that momentum.”

E*Trade is known as an innovator in the Canadian discount brokerage industry and as a robust competitor to the bank-owned discount brokerages, lowering fees and giving consumers an alternative to the banks. The fact that E*Trade is no longer an independent player will alter the discount brokerage landscape in Canada, experts believe.

“This deal further concentrates the business in the hands of the banks, but that could create opportunities for the few independent [discount brokers] left,” says Guy Armstrong, a senior consultant at Investor Economics.

The E*Trade sale marks the exit of parent E*Trade Financial from the Canadian market after more than a decade in this country. As a result of the parent’s sharp decline in value, it has been looking to raise capital by selling all “non-core” assets as part of its turnaround plan. IE