After Vancouver-based Phillips Hager & North Investment Management Ltd., was sold to Royal Bank of Canada late last month, PH&N president John Montalbano conceded that there is a risk to the firm’s clients if its executives depart after the deal closes. That’s why he’s careful to emphasize that 90% of its 47 shareholders have signed five-year non-competition agreements that prevent them from setting up shop elsewhere to service PH&N’s existing clients.

“It’s very unique,” Montalbano says of the non-competes. “We looked at historical transactions that had a money management firm taken over and, in many cases in a relatively short period of time, the principals left. And we wanted to be different,” he says. “We felt so strongly that this was in the best interests of our clients.”

Adds Montalbano: “Royal Bank of Canada didn’t push for the clause. PH&N brought it to the table because it wanted to prove that it had its clients’ best interests at heart. We expect to be here for the long run. It was something we put forward to show our commitment to this.”

RBC agreed to pay $1.36 billion in shares, the large majority of which is to be paid on closing, April 30. Another “significant” portion will be vested over the following three years, says RBC. But the question of attrition remains: if they don’t like their new bosses, any one of the principals at PH&N now has the freedom not to work. But Montalbano thinks departures for this reason are unlikely to happen. Many of the principal executives at the firm are in their early 40s, he points out and want to continue working. “We’re in the sweet spot of our careers. We love this business,” he says.

With the acquisition, which took many by surprise, RBC takes on about 600 institutional clients across the country with assets under administration of about $55 billion. George Lewis, the head of RBC Wealth Management, says that the diversity of PH&N’s portfolio of institutional clients has always been attractive to the bank.

It is comprised of defined benefits and defined contribution plans, endowment funds for foundations and first nations funds.

The acquisition also includes about 6,000 client accounts linked to independent advisors, totalling assets worth about $19 billion. Lewis says it’s important that, over the past seven years, the bank has developed its own broad relationship with independent advisors through wholesalers who are dedicated to the independent distribution platform. As a result, about 25% of the bank’s retail sales are now made outside of its branch network. Together with PH&N, RBC should be “a preferred provider for advisors in Canada,” says Lewis.

PH&N’s hallmark has been good performance, value and great client service, says Montalbano, and he is confident the culture at RBC will accommodate PH&N’s approach. That conviction is supported by history, Montalbano says. The principals at PH&N were watching when RBC acquired Dominion Securities in the 1980s and in Montalbano’s view, the broker has maintained its independence and dedication to its clients.

“Knowing that organization, and seeing it was a similar organization to ours helped,” he says. “In fact, we’ve hired many people over the years from DS, and they’ve taken on prominent roles in our firm. And the reasons we’ve hired them is that there’s such a cultural fit.”

As CEO of RBC Global Asset Management Inc., Montalbano will report directly to Lewis who oversees the entire management group, including its U.S. brokerage business, RBC Dominion Securities Inc., and its U.S.-based institutional investment manager, RBC Voyageur Asset Management.

Montalbano will oversee PH&N’s business, RBC Asset Management Inc. in Canada, and Voyageur. Brenda Vince will become president of RBC Asset Management, overseeing mutual funds and private clients’ business, and report to Montalbano. Vince also oversees other wealth management business, including international enterprise solutions.

Dan Chornous, chief investment officer at RBC Asset Management, takes on that role for PH&N as well. PH&N’s Hanif Mamdani, the manager of the firm’s high-yield bond fund, will lead alternative investments for RBC Asset Management as well. Damon Williams continues to oversee PH&N’s institutional business, based in Vancouver. Mamdani’s role was of particular importance to both Lewis and Montalbano in the context of client service in the future.

Montalbano emphasizes that PH&N’s clients will get more access to the products they need. More and more institutions and private clients are looking for alternative approaches that offer so-called “absolute returns,” he says. To satisfy income and payout requirements as they head into retirement, pension funds and private clients alike want to guarantee certain minimum targets. Montalbano says those goals are increasingly important as interest rates remain low.

@page_break@Hedging strategies, and investments in asset classes not correlated to equity and fixed income, have also become more important. “We had been incubating a number of ideas,” says Montalbano, referring to a market-neutral quantitative hedge fund. “The combination, together with access to capital, allows us to come to market with a strong alternative suite that we otherwise would not have had in the long run.”

Lewis says “de-accumulation products — in the sense that a part of the lexicon for people saving towards retirement was accumulation. We’ve got many in place, many in the works, and you can expect to see some exciting new products from [Montalbano’s] team going forward.”

Industry analyst Dan Hallett, president of Dan Hallett and Associates Inc. of Windsor, Ont. says in a note to his clients that he sees strength in the deal. Chornous has improved RBC’s equity investment discipline, so advisors should be pleased on that front. But after the non-compete deal is up, anything can happen.

Hallett also strikes a note of caution. RBC fumbled acquisitions of Connor Clark and RT Capital. Both were bought in the 1990s and were much smaller than PH&N. He also speculates that RBC will launch versions of PH&N funds with a mix of deferred, low load, and front-end options simply to match options on other products. He notes PH&N recently launched B and F series units to attract more attention from independent financial advisors. IE