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The corner of Bay Street and Adelaide streets in Toronto’s financial district.Gloria Nieto/The Globe and Mail

In the two days since Richardson GMP agreed to buy the Canadian retail investment brokerage network of Macquarie Group, it is a safe bet that the phones of the best financial advisers at both firms have not stopped ringing.

Some of those calls will be clients, wondering what the transaction means for their accounts. Many more of them will be rival firms looking to capitalize on the change to lure away top producing investment advisers.

One of the hidden costs of any purchase in wealth management is retention. So Richardson GMP may say that the purchase costs $132-million and will basically double its assets to $28-billion, but the fact is both those numbers are subject to change.

To keep the assets, Richardson GMP is going to face demands from key brokers for retention cheques, a lesson driven home at National Bank of Canada when it bought the Canadian brokerage arm of HSBC PLC. Retention became a key issue, as it always does. National Bank had a hard time hanging onto the assets it paid up for.

In an interview with the Globe and Mail, Richardson GMP head Andrew Marsh declined to be specific about what he expected retention costs to be.

But one person in the brokerage business, who has some knowledge of Macquarie's set-up, said that many of the top brokers at Macquarie Private Wealth are not on retention agreements, and putting them in place could add many millions of dollars to the purchase price.

Richardson GMP will no doubt try to offer shares. The counteroffer from the best brokers will be a cash payment. Top performing brokers have leverage because they can threaten to take their large books of assets elsewhere, reducing the value of the acquisition to Richardson GMP in a hurry.

Industry sources say the going rate will be 100 per cent to 125 per cent of the average revenue a broker generated over the past couple of years. The buyer will push for a short time frame for the measurement, to take advantage of the fact that revenues have been depressed in recent years. The brokers will counter with a demand for a measurement taken over three years or more.

It's going to add up to millions of additional dollars, whether in cash or shares, and that has to be added to the purchase price. A broker producing a million dollars a year of revenue will be looking for a payment worth at least that.

The irony here is that Macquarie was one of the most aggressive recruiters of brokers in recent years, and helped drive up the going price for retention agreements in the business.

The other issue that Richardson GMP will have to deal with, and which rivals will try to exploit, is the potential for culture clash. Richardson GMP has pushed hard to create a fee-based wealth management business with a highbrow feel. Macquarie's is more transactional, with a big portion of revenue said to still come from commissions. Richardson GMP will have to migrate the business more to a fee based model without alienating acquired brokers that it wants to keep.

Rivals will not only be calling Macquarie brokers, but also top Richardson GMP brokers, arguing that the purchase means their business is changing in a way older-line Richardson brokers won't like.

There will be brokers Richardson GMP won't want to keep, to be sure. But getting them to leave can also be expensive, as there are inevitable severance costs. The acquirer in this case won't be paying full boat for those severance cheques, as Macquarie is said to have agreed to cover much of the severance that's required as part of getting the deal done.

Richardson GMP also won't be on the hook for the generous recruiting commitments already made by Macquarie. Those payouts to bring brokers over were structured as forgivable loans. The broker gets paid up front, and over a set term, so long as the broker does not leave Macquarie, the loan is forgiven in chunks. If the broker does leave before the agreement expires, any outstanding portion must be repaid.

There is no cash requirement from Richardson GMP. Macquarie has already paid out the money. In fact, if brokers leave, there's a bit of a kicker to Richardson GMP in that the loans will have to be repaid to Richardson GMP. It's not a bad deal.

Even with the retention issue, which is largely unavoidable, it works out to a good deal in the end for Richardson GMP.

Wealth management is increasingly driven by scale. Regulatory costs are climbing, despite no end of lobbying by the industry for relief. Being able to spread costs over more assets is one of the only ways to fight back.

In the past few years, many midsized networks have disappeared in sales to rivals. National Bank bought Wellington West and HSBC's retail business, for example.

There are few other big independent wealth management businesses that are likely to come up for sale to help others solve their scale problems.

It's not clear what Canaccord Financial does to stem the losses in its Canadian wealth management business. For now, Canaccord seems more interested in other markets such as the U.K., where margins are better. But selling Canadian retail, where Canaccord has its roots, seems unlikely.

Raymond James has a big network in Canada, but has never given any indication it wants to do anything but what is already doing – running a steady business.

After that, other potential sellers are much smaller.

Opportunities to double in size are now – with Macquarie's business sold -- nearly impossible to find.

That's worth a few headaches.

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(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)

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