TD Bank seen as ‘logical buyer’ for Richardson GMP

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Toronto-Dominion Bank is best positioned to win the auction for wealth-management firm Richardson GMP, according to several Bay Street sources.

A rival financial services executive familiar with the talks even acknowledged TD is the "logical buyer."

The wealth-management firm is on the auction block with TD among the bidders. TD, Canada's second-largest bank by assets, made it past the second round of bidding, as The Globe previously reported. Other bidders in the auction have included rival independent Raymond James.

For years, Raymond James was assumed to be the eventual acquirer, but now that the Big Six bank with much more financial heft is involved, several senior sources stress TD is most likely to win.

TD has expressed a desire to expand in wealth management because retiring baby boomers will need less help borrowing and more help preserving their wealth.

In Canada, there are few options for growth because the Big Six have already scooped up most independent brokerages.

Technically, three independents still sport sizable adviser networks: Richardson GMP (RGMP), Canaccord Genuity and Raymond James. Yet while TD has options, Canaccord's business is considered undesirable, and Raymond James has recently proved it's a buyer, not a seller, acquiring MacDougall MacDougall & MacTier Inc. in May.

RGMP also serves wealthy clients, which makes it more desirable.

Royal Bank of Canada, TD's top banking rival, has proved the retail brokerage business can be lucrative if it targets high-net-worth households – often those with investable assets worth at least $500,000.

Because retail advisers absorb a large chunk of the fees they bring in – sometimes as high as 50 per cent of their revenues – lower-cost products such as exchange-traded funds are making it harder to justify the hefty adviser payouts.

At TD, a deal for RGMP likely wouldn't have been possible under the bank's old leadership. Former chief executive Ed Clark, who retired in 2014, and former Canadian banking head Tim Hockey, who left the bank in 2015, thought their branch network was the best way to distribute wealth-management products – not additional adviser offices. Because the branches already exist for day-to-day banking needs, selling more products through them made the most economic sense.

Bharat Masrani, TD's current CEO, doesn't necessarily see it that way. Although he was Mr. Clark's former right-hand man, he's shown some desire to differ on strategy. Notably, he has talked about beefing up the bank's capital-markets arm.

To secure a deal for RGMP, he'll have to smooth some wrinkles. Beyond the obvious question of price, TD will have to appease multiple parties – and each has different interests.

TD declined to comment, saying it does not respond to rumour or speculation.

RGMP has three owners: GMP Capital Inc., the Richardson family and the brokers themselves. GMP is probably the easiest to appease, because the dealer doesn't have the cash for an acquisition right now, and its stock price doesn't make a share-for-share deal possible.

The Richardson family appears interested in selling, but they may want tax-deferred stock in return. When the family sold their former independent dealer, Richardson Greenshields, to RBC in 1996, they took a large number of Royal Bank shares as payment, giving them exposure to financial services, and helping to defer taxes from the sale. Canadian tax laws allow you to "roll over" capital gains on a share-for-share deal, so you only pay tax when you sell the new stock.

TD may not be interested in such a structure, because it would dilute existing shareholders, according to sources. One way around it is to issue shares as part of the purchase, and then launch a share buyback for the same amount of cash. The Richardson family did not return a request for comment.

Then there are the advisers. The common assumption is that they would never want to work for a bank. There's some truth to that – many are at RGMP because they value their independence, allowing them to sell whatever they want to their clients.

But in a world where the Canadian banks are clearly winning the wealth-management war, at some point advisers may be willing to plug their nose and join the party – so long as they get a good price. Because they own such a significant stake of RGMP, they have a powerful say in determining what that price will be.

This can be beneficial for TD. The big fear for any acquirer is that the advisers will jump ship for a rival as soon as the deal closes. If TD is willing to pay a pretty penny, it can use that as a negotiating tactic to get the brokers to sign agreements to stay with the bank.

Editor's note: An earlier version of this story said Tim Hockey retired from TD. Although he left the bank to run TD Ameritrade, he didn't formally retire.