The Globe and Mail

I wonder how Stephen Jarislowsky will feel Friday morning. Larry Lunn, too.
Mr. Jarislowsky is, of course, a co-founder of one of the three remaining independent firms that make money mangement bible Benefits Canada's list of the top 10 players in Canadian institutional managers.
I imagine he will wake up feeling even wealthier, as news of Royal Bank’s $1.4-billion purchase of the No. 4-ranked fund manager, Phillips Hager & North, percolates through this clubby but ultra-competitive industry. But Mr. Jarislowsky also has to be a little worried.
Employee-owned PH&N’s decision to sell is a seminal event for the entire industry, but will resonate most strongly at the remaining large employee-owned firms.
Along with Jarislowsky, Fraser, which oversees assets of $54-billion, compared with PH&N’s $69-billion, there are two independent franchises that would give any buyer instant credibility in this space: Vancouver-based Connor Clark & Lunn Financial, where Mr. Lunn hangs his hat, has $34.7-billion of client assets, and Regina-based Greystone Managed Investments, with assets of $31.7-billion.
PH&N’s decision to sell is a shock because banks have courted the Vancouver-based firm for years. Employees have always said a polite no to overtures. The 44-year-old firm posted double-digit growth without any need for outside capital, and managed succession smoothly - no small feat in this industry.
But PH&N president John Montalbano said attitudes shifted after a recent strategic review that showed client needs would become increasingly complex over the next five years, and the money manager would be hard-pressed to meet those needs. The employee-shareholders realized they might need a deep-pocketed parent to remain competitive. Rival players among Canada’s top 10 money managers include Barclays, State Street and AllianceBernstein, all foreign-owned and far larger.
Enter Royal Bank head of wealth management George Lewis, chequebook in hand, on a courtesy call that’s resulted in a monster deal.
Royal Bank won the day by offering a premium price, but PH&N executives are also signalling that in an increasingly global market for wealth managers, their past looked better than their future.
Mr. Lewis has doubtless made all sorts of promises on preserving the PH&N culture, and he will need to honour these undertakings, as clients will watch for any sign of turmoil or a slip in performance. The fact that Royal Bank is paying in shares, which vest over three years, will keep staff departures at a minimum for the rest of this decade.
Based on the success of past acquisitions, such as the wealth management arms of brokerage houses Dominion Securities and Richardson Greenshields, watch for PH&N employees to be pleasantly surprised by the asset-gathering power of the Royal Bank franchise.
Toronto-Dominion Bank was the only bank that could lay claim to being a major player in institutional money management, with $146-billion of assets. Now Royal Bank has strengthened its hand, adding PH&N to one of the dominant mutual fund platforms.
There’s a herd mentality among Canadian banks, and the three major domestic insurers also have ambitions in this space. International money managers have also shown they are willing to pay top dollar for domestic franchises.
The remaining independent Canadian money managers are going to sell their firms. PH&N just helped determine how much these franchises are worth. It’s now just a question of when Mr. Jarislowsky and his peers cash in, and who writes the cheque.