Advisors under the Berkshire-TWC umbrella will receive offers for share options amounting to up to 15% of the company, part of Berkshire Group’s long-term strategy. One of its top executives calls the offer “almost a Cinderella story.”

“I expect to be issuing letters any day now,” says Frank Laferriere, chief operating and chief financial officer for the Burlington, Ont.-based company. The option offers will be distributed to more than 70% of advisors in the Berkshire holding company.

The issuance is part of a greater strategy to invest heavily in the high-margin investment-banking business, and to show its advisors and stakeholders that Berkshire is no longer just a small mutual fund dealership from the suburbs of Toronto. It’s a full-service planning firm able to grow financial value consistently, says Laferriere, formerly a financial services consultant with KPMG LLP and a regulator at the Office of the Superintendent of Financial Institutions in Ottawa.

“The goal of investment banking is to source product for the advisor,” he says, describing the heart of Berkshire’s growth plan. “The capital markets group was established to provide specialized services and support, and the group’s mandate is to be responsive to advisor needs and client needs, because that’s what we’re driving at.”

Michael Lee-Chin, chairman of Berkshire and its autonomous sister company, mutual fund company AIC Ltd. , will retain about 80% of the shares in the company Lee-Chin views as “an investment,” says Laferriere, who has been at Berkshire since 1998. The rest of the shares are owned by a handful of executives, including Tim Calibaba, founder of TWC Financial Corp., which Berkshire acquired in 2003, and some independent advisors who had ownership in TWC. Calibaba remains with Berkshire.

Laferriere will not discuss whether Berkshire has a long-term strategy to join the legions of Canadian companies converting to income trusts — nor if it has any plans to be publicly traded. He says investment law prevents him from discussing the subject.

“I can’t even speculate. But, you know, at the end of the day,” he adds, “every company must address questions of that nature. Right now, all we’re focused on is executing our strategy, which is to grow quality retail, to grow the capital markets and investment banking businesses, and to translate that into real value for all of the stakeholders — which we think is on track.”

Share ownership by employees is not new in the Canadian financial services industry, but some consider this model controversial because of the potential conflict of interest advisors face: do advisors put clients’ interests first or does building value in the firm become more important when advisors own shares? Advisors can see for themselves that assets under management are often valued 10 times more richly than assets under administration. In theory, proprietary product sales benefit them much more than third-party product sales. But, at least, Laferriere points out, Berkshire doesn’t have an incentive for advisors to sell Berkshire wrap products nor the funds of its sister company, AIC.

The trading desk of Berkshire Securities Inc. , the company’s Investment Dealers Association of Canada member firm, participated in about 70 syndications last year “ranging across the spectrum” in size, says Laferriere, who also worked for the broker-dealer arm of Barclays Bank’s Canadian subsidiary before it was sold to Credit Suisse First Boston Ltd.

Berkshire tends to take 1%-5% of the deals, which, in total, amounted to about $5 billion in capital. He says the deal-making has increased substantially over 2003, when it acquired the embryonic capital markets arm in its acquisition of TWC.

That capital markets arm, which has tended to operate mostly from Vancouver, will now build a beachhead in Toronto. Sean Robitaille, formerly head of equity private placement at Bank of Nova Scotia, has joined Berkshire to develop and grow a team. That includes a handful of chartered financial analysts who crunch the numbers on deals.

“We expect someone like Sean to help catapult us into that next layer,” says Laferriere, already placing Berkshire in the same league as such independent brokerages as Toronto-based Raymond James Ltd. and Winnipeg-based Wellington West Capital Inc.

“We’re probably going to bring in some research analysts to groom that whole side. We intend to grow organically instead of through acquisition, and our goal is to make sure that we become a pre-eminent force on the independent side.”

@page_break@Only since Berkshire completed its systems merger with TWC has the retail sales network been profitable, says Laferriere. Investment banking “is very profitable” and an integral part of Berkshire’s strategy to show “real financial value” to its stakeholders.

As such, the company’s transformation into a full-service brokerage is also important.
The greater the number of its 890 mutual fund-licensed advisors who convert over to its IDA platform, the better. One of the most difficult parts of gaining access to the syndications is to grow the retail distribution side of the business. But Berkshire is doing it, Laferriere says, and continues to add 10 advisors a month.

400 securities-licensed

“The more placing power you have, the greater the allocations you have and the greater certainty you can have,” he says. “And the better the chance we have of eventually developing relationships with issuers ourselves — which we think we’ll be able to do.”

Berkshire has about 400 advisors licensed to sell securities so far, but, Laferriere says, the company’s administration is booked through to December to convert other advisors, so the number continues to grow. He says these advisors tend to do about 30% more business than the company commits to under the syndication deals.

Berkshire Investment Group Inc. is the company’s Mutual Fund Dealers Association-registered firm, but more than half of the company’s $12 billion in AUA are held under its IDA-registered Berkshire Securities. The company also operates an insurance arm, Berkshire Insurance Services Inc.

Laferriere understands that some advisors will bristle at the growth of an investment-banking business. But he insists that the firm will never call morning meetings to push the latest deal.

“Our capital markets group is supposed to be advisor-driven, and it’s supposed to be responsive to the advisors,” Laferriere says. “Our advisory counsel wouldn’t stand for us dictating to advisors. That’s the biggest difference at Berkshire.”

Dual system and regulation costs continue to eat into profitability at the firm, as they do across the nation. But, Laferriere says, Berkshire has spent a lot of capital in merging TWC systems with its own and completing the combination of its MFDA and IDA trading platforms, with “enviable” results.

Berkshire’s growth is a compelling story, Laferriere maintains. The firm is proud of its mutual fund dealer roots, but the fact is that a lot of advisors want to offer a full suite for their clients, he says: “We’re all about choice and we want to continue to grow. We don’t
want to be pigeonholed.” IE