More than a year after Toronto-based Rockwater Capital Corp. purchased money manager KBSH Capital Management Inc., the acquisition is starting to bear new fruit. And Rockwater’s corporate strategy is looking clearer as well.

Advisors at Blackmont Capital Inc. , Rockwater’s newly branded wealth-management subsidiary, can soon expect to see a few new mutual funds, built on KBSH’s institutional platform, added to their sales offerings. The company has not yet decided how the funds will be branded.

“I can’t say at the moment,” says Bill Packham, Rockwater’s president and CEO. “But there will be some of the higher-performing mandates, and we will take them to the market.”

In the six months following the December 2004 merger with KBSH, Rockwater experienced some turbulence with manager retention and client turnover. But things have now settled and KBSH has even won a few new mandates, says Packham. “We have some excellent managers,” he adds. “[And] we’ve been meeting to execute on our strategy.”

Packham is now willing to discuss Rockwater’s growth strategy after a six-month period of regulatory silence while it financed the KBSH purchase with almost $30 million in convertible debt from Montreal-based Caisse de dépôt et placement du Québec and another $5 million from senior managers at the financial services firm — including Packham himself.

He says Rockwater’s fund wholesalers will soon be on the road selling their new wares through third parties. But that is just a small part of the corporate strategy. The plan is to build a publicly traded financial services company with a diversified revenue base and high margins. The firm maintains an aggressive goal to reach $20 billion in assets under management by the end of 2008, a target it set in 2003.

“We are still holding to that. We still think it’s achievable,” says Packham. In the third quarter ended Sept. 30, 2005, the company’s assets under administration reached $7.1 billion, up 34% from the same date a year earlier.

But Blackmont needs to recruit new advisors to help its parent company achieve that goal. Although Packham acknowledges that the competition is stiff for advisors, this past quarter has reminded him that it is less important to concentrate on the number of recruits than on the assets they have under management.

“We’re finding that we are acquiring individuals who have more substantial practices than we had initially thought,” he says. “And because of that success, we think we can build our business with fewer individuals, which obviously gives us a highly productive organization and one that is more profitable if it is built around fewer individuals.”

In 2005, Rockwater added 22 advisors. It now has a total of about 180 across the country, located in 10 of the 14 major markets, with its strongest bases in Toronto, Calgary and Vancouver. Like all wealth managers, the firm wants to acquire more of these small to medium-sized branches.

During Rockwater’s recent third-quarter conference call, Packham said that the company’s 13 newest advisors each manage an average of $76 million in assets.

“It’s partly a recognition among well-established advisors that our platform has come a long way and that we are able to accommodate higher-level advisors,” says Packham. “That is not to say that we won’t bring in those advisors at $50 million. But in those cases, the advisors are new in their careers and in ‘rapid growth’ mode.”

It also helps that Blackmont’s capital markets arm has grown, adds Packham. About 35 analysts and associates work on its research team, which covers about 120 companies. And in deal-making terms, its investment banking business has grown tenfold, to about $40 million a year, since it was acquired as part of the takeover of First Associates Investments Inc. Blackmont also participated in about a dozen investment banking deals each month in 2005, he adds: “We’re looking at a mid-cap focus now.”

Besides the high-margin new-issues business, other products will attract advisors to Blackmont, says Packham. Its managed product features “all the bells and whistles” — including reporting that is designed to include non-managed assets.

Meanwhile, Rockwater has delivered a handful of structured notes to advisors through KBSH — a product type the firm plans to develop further and sell through third-party channels.

Apart from the integration of KBSH, more changes were seen in 2005. Some of them were comprehensive, including changes to its data service, while others, such as improving its marketing strategy, were more cosmetic.

@page_break@In the past, advisors punished the firm in both external and internal report cards for its poor technology offering, Packham admits, and First Associates’ marketing strategy had been scattered. But a move to the popular data vendor ADP Datafile — which, Packham says, is an improvement over the firm’s former IBM ISM-based data platform — will straighten things out, he adds.

And although it may have taken longer than it should have, Packham says, the Blackmont name was carefully researched and not imposed willy-nilly on advisors who have their own brand. “We offer a customized marketing service to advisors that allows them to tailor the look and feel, and the way in which they want to present and market themselves to clients,” he says.

All this has meant a lot of rapid change, but it should translate into advisor loyalty and happiness, Packham says. Rockwater is a relatively new firm, and advisors and staff come from many different places. They also all have different expectations, which were formed at their previous firms. “Now we have to make sure that we develop a platform and improve upon it in order to get us to where we really want to be,” he says.

Of course, higher share-price performance would help on that front because advisors receive part of their compensation from the firm’s continuous three-year option payout plan, which is winding up its second year. Depending on advisors’ sales performance and AUM, they can earn up to 8% of their yearly income in deferred shared options.

“As people accumulate three years of awards, they will start to realize that this is a very beneficial program. And it also makes our compensation competitive with that of other firms,” Packham says.

He adds that compensating advisors with company shares is as old as the industry itself, and the presence of in-house products should not distract an advisor from serving his clients.

“We are not differentiating ourselves by trying to build our assets under management quicker and better because we’re focused on internal managers rather than external ones,” he adds. “We run an open-architecture platform that allows advisors to pick and choose how and where they want to do business.”

Rockwater’s strategy of recruiting entrepreneurial advisors, while at the same time concentrating on the high-margin investment-banking business, is well recognized in the industry. But the firm has the advantage of strong sightlines. Packham, an avid amateur pilot, knows these skies well. In laying out his vision for Rockwater, he has leaned heavily on his experience at Midland Walwyn Capital Inc.

With Rockwater’s chairman, Robert Schultz, Packham ran that high-flying independent brokerage in the mid-1990s. Stuart Raftus, Blackmont’s president, is another former Midland Walwyn manager.

“We have a very experienced team here. The wealth-management team members have spent the bulk of their careers in that area, and many of them were on our Midland Walwyn team,” Packham says. “The environment and the culture we created at Midland Walwyn is something we very much want to recreate in this business.

“We make sure we know what advisors need, and that they have the tools they need to run successful practices, because we have been involved in this business for years.”

Advisors may, of course, remember what happened to Midland Walwyn, which was the first choice among independents for several years. On U.S.-based Merrill Lynch & Co. Inc.’s second foray into Canada, when equity markets were beginning to bulge in 1998, it paid a pretty penny to acquire the publicly traded Midland Walwyn. A short time later, as the industry flagged, Merrill sold its retail business to CIBC (which later merged it with CIBC Wood Gundy), leaving many of these independent-minded advisors suddenly working for a bank.

At that point, Packham says, his management team saw an opportunity. “Veteran advisors in the industry were telling us to get back out there,” he says.

Advisors know the dangers of working for a publicly traded company, especially those who worked at Midland Walwyn. Being sold twice by two former suitors in four years is an experience they are not likely to forget quickly. It was hard on them and on their clients, and it was not until last year that they stopped punishing CIBC Wood Gundy in Investment Executive’s annual Brokerage Report Card. IE