Vancouverites were shocked when they woke up on Feb. 20 and learned that Phillips Hager & North Investment Management Ltd. had sold out to Royal Bank of Canada.

PH&N manages money for institutions (mainly pension funds) and individuals (mainly through its family of mutual funds). It provides excellent customer service, low fees and excellent long-run returns — a hugely successful formula. PH&N now looks after $69 billion of other people’s money, making it Western Canada’s largest money-management firm, by a long shot.

The people who shaped this firm — Art Phillips, Bob Hager, Rudy North, Dick Bradshaw, Tony Gage — have been first-class citizens and generous community contributors. They hired many University of British Columbia business graduates and donated large amounts of time and money to community endeavours. Their successors have mostly replicated that style and substance.

This is what made the announcement such a shock. RBC is a huge Toronto-based bank, the biggest in the nation, with all the warmth and personality of Godzilla.

A few years ago, I went into a local RBC branch on the pretext that I wanted to invest my entire life savings of $100,000. An employee gave me a business card with the titles of “personal financial service representative” on one side and “mutual funds representative” on the other. She asked a bunch of questions — how much I made, how much I was worth, how old I was — and punched it all into a computer. The computer (not her) recommended the RBC Select Conservative Portfolio, an amalgam of 14 RBC funds, representing more than 1,000 investments.

Because of its broad diversification, the fund was doomed to mediocrity. Subtract management fees and it was bound to underperform the market. Indeed, the bank’s own disclosure documents confirmed it had done just that. This is not to say that all RBC mutual funds are bad. In fact, RBC has some very good funds. It was the process that left me cold.

When the merger was announced, both parties recited all the synergies they expect to realize, at the same time insisting they would maintain PH&N’s distinctive corporate culture and highly personalized client service. The media repeated the party line, as though there was no inherent contradiction here.

The people who negotiated the deal are sensitive to the little things that made PH&N a great firm and don’t intend to meddle with them. But it is quite possible — probable, even — that a few years from now, new people will arrive on the scene and have the brilliant idea of rationalizing the entire operation and putting it all under the RBC banner. Then, PH&N will be no more than a fond memory.

There is a danger, however, in romanticizing PH&N. Although its bond performance has been good, its equities performance has been flagging in recent years. Its biggest fund, PH&N Dividend Income Fund, lost 9.9% over the 12 months ended Feb. 29, placing it squarely in the fourth quartile. And its second-biggest fund, its Canadian Equity Fund, returned just 0.3%, placing it in the third quartile. Indeed, recent performance has been so mediocre that an executive with one of PH&N’s competitors told me that some PH&N clients were defecting to his firm for the first time in 25 years.

Also, PH&N had reached a critical size. If it was to grow larger, it would have to develop alternative investment products, which means charting new territory and assuming new risks. RBC’s buyout offer enables the firm’s 60 shareholders to turn this risk into reward by offering to swap their shares for $1.4 billion worth of RBC shares — for an average of $23 million each.

The deal gives PH&N shareholders much more liquidity than they had and, therefore, less incentive stay with the firm. The bottom line is that the rewards to PH&N shareholders are real and immediate, while the benefits to clients remain theoretical and prospective. IE