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While BlackRock Canada gains access to RBC’s massive client base, the bank instantly becomes a major player in the ETF business.

Kathryn Hatashita-Lee, Photographer/istock

The partnership between Royal Bank of Canada (RBC) and BlackRock Asset Management Canada Ltd. (Blackrock Canada) to create RBC iShares, a unified family of more than 150 exchange-traded funds (ETFs) with $60-billion in assets under management, is bound to reshape Canada’s investment landscape.

Yet, the impact and motives behind the deal have left many advisors scratching their heads as to what it means for their practices – and the investment industry as a whole.

“It’s not really clear who the winners are,” says Mark Yamada, president and chief executive officer of PUR Investing Inc. in Toronto.

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The assumption is that BlackRock Canada comes out ahead because it now has access to RBC’s massive distribution network and client base. “But it’s not quite as easy as that because in order to sell or use iShares products, the appropriate regulatory registration is required,” Mr. Yamada says, adding that the bulk of RBC’s clients likely work with branch-based advisors licensed to sell mutual funds only, most of whom have not obtained the necessary proficiency requirements to offer ETFs to clients.

(Many of RBC’s clients who work with securities-licensed advisors at RBC Dominion Securities Inc., RBC’s brokerage subsidiary, could obtain ETFs from these advisors directly.)

Still, the Bank of Montreal (BMO), another big bank that happens to be the second-largest provider of ETFs behind BlackRock Canada, has already shown the way forward in this respect. As Mr. Yamada notes, BMO packages its ETFs within mutual funds so that its large stable of mutual fund-licensed branch-based advisors can offer these products.

And that’s helped to swell assets under management (AUM) for BMO’s ETFs, he adds.

If RBC could do the same, both the bank and BlackRock Canada would likely see a significant growth in market share for their ETFs, which include index-tracking, smart beta and actively managed products.

Firms could use a boost

Indeed, the partnership is probably an effort to gain market share for both firms at time when they could both use a boost, says Alan Fustey, portfolio manager at AdaptiveETF, formerly known as Index Wealth Management Inc., in Winnipeg.

“BlackRock’s iShares has been the perennial leader in Canada for ETFs,” says Mr. Fustey. “But now market share is going to Vanguard and BMO, so it had an obvious problem.”

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What’s more is that RBC – like the other big Canadians banks – recognizes ETFs are the future as investors are increasingly attracted to their low fees relative to traditional mutual funds. Additionally, the bank, Canada’s largest asset manager, has struggled to gain traction in the ETF space.

“RBC was fifth [in terms of AUM] at the end of [2018] – but it was a distant fifth,” Mr. Fustey says. “This really works well for RBC because it gains instant size by putting its brand on these ETFs.”

Yet, the impact on independent advisors is unlikely to change given that ETFs, by nature, trade on a stock exchange and are accessible to all investors.

A harbinger of events to come

And although some might assume the partnership may lead to market consolidation and less choice, one industry observer argues the opposite.

“There’s certainly going to be a bit of overlap at the margins,” says Dan Hallett, vice-president and principal at Highview Financial Group in Oakville, Ont., which inevitably will result in some similar funds being merged. “But the move will likely involve a lot more product coming out on the market and, at the end of the day, I think that’s a negative for investors and advisors.”

Mr. Hallett believes the partnership is a harbinger of events to come, similar to what occurred with the mutual fund industry in the 1980s and 1990s, when the banks also sought to increase their presence in that space. The industry then “ballooned” in size – along with a growing array of products.

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“And when you had a larger product universe, it became tougher to make good choices and people then spread their money out more thinly than they should have,” says Mr. Hallett, who has followed the evolution of both the mutual fund and ETF industries in Canada closely.

This led to less than ideal outcomes for many investors working with advisors, he adds.

“To the same extent that is what’s now happening with ETFs.”

Already, the number of ETFs in Canada alone has increased to several hundred from a few dozen in the past decade, he says.

“To be fair, this trend would continue without this deal.”

Furthermore, the partnership “does validate that not only is the ETF segment growing faster than mutual funds, but that it has a lot of years of growth ahead of it,” Mr. Hallett adds.

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Focusing on high-end services

Perhaps more than anything, the RBC and BlackRock Canada partnership illustrates how ETFs are pushing portfolio construction increasingly toward commoditization, Mr. Yamada says: “ETFs themselves are little portfolios.”

Investors can now arguably build a portfolio of two or three ETFs and be reasonably diversified. And that’s an existential threat to an industry built on providing investment advice.

The big banks likely understand this, he adds, and probably “don’t want their advisors to be fooling around with portfolio construction anymore.”

Rather, they likely prefer the focus to be on retirement, tax and estate planning, Mr. Yamada adds.

“All of those things are what John Q. Public or Jane Q. Public really don’t have ready access to – and that’s of material value to advisors and their clients.”

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