In basketball, a generation of kids grew up wanting to be like Mike. In money management, two generations of stock pickers aspired to be like Steve.
Stephen Jarislowsky became a role model in financial circles over a six-decade career by building one of the country’s largest asset management firms – Jarislowsky Fraser Ltd. – and a national reputation as an outspoken investor advocate. The 92-year-old is likely to be equally influential as he exits the stage by selling his firm to Bank of Nova Scotia for $950-million.
If the fiercely independent Mr. Jarislowsky is willing to hand his legacy over to Scotiabank, any money manager is a potential seller to a bank. And the Canadian banks all covet a larger share of what they see as a lucrative wealth management market.
So far this year, two banks have committed a total of $4.3-billion to snapping up three independent money managers. Toronto-Dominion Bank is buying Greystone Capital Management Inc., which oversees $36-billion of assets, while Scotiabank landed MD Financial Management and its $49-billion of assets, along with Jarislowsky Fraser, which calls the shots on $40-billion.
The deals will keep coming, as Economics 101 is at play: There is strong demand from banks, and a ready supply of asset management firms.
Let’s deal with the demand side of the equation: Banks are targeting wealth managers because their funds are seen as “sticky” assets. That means clients tend to keep their savings parked at one firm. Managing money generates income that is both predictable and relatively rich; Canadians pay among the highest fund fees in the world, as the sector’s more aggressive advertising campaigns now like to point out.
For bank shareholders, a dollar of reliable profit from wealth management commands a far higher earnings multiple than a far less predictable dollar earned from corporate lending, or investment banking. Buying a fund manager is an investor-friendly growth strategy for a bank CEO.
Scotiabank and TD can step up with acquisitions because, as with the rest of Canada’s banks, they are flush with cash. Regulators require the banks hold capital equal to at least 10.5 per cent of their risk-weighted assets. In a report Thursday, RBC Dominion Securities Inc. analyst Darko Mihelic said the six big banks’ capital ratio is currently at a healthy 11.5 per cent and will rise to 12.1 per cent by next year, “creating more opportunities for acquisitions and/or share buybacks.”
Even a relatively large takeover makes a small dent in the banks’ capital base. Mr. Mihelic forecasts TD’s $792-million takeover of employee-owned Greystone will lower the bank’s capital ratio by less than 10 basis points, or just a tenth of a percentage point, when it closes later this year. Up to half the Greystone takeover will be paid for with TD shares, with the rest in cash.
Now, where will the supply come from? That’s where Mr. Jarislowsky’s example looms large. There are a number of independent fund managers with aging founders, who will eventually want to cash out on their earnings. Selling to a bank or rival fund company, either of which will pay a premium, will put far more cash into the founders’ pockets than passing the torch internally, to younger colleagues.
Want names? Look at Jean-Guy Desjardins, who is a youthful 73 years old. He sold his first fund management firm in 2001 to Canadian Imperial Bank of Commerce. Now Mr. Desjardins is CEO and guiding light at Fiera Capital Corp., which oversees $131-billion. You know he’s thinking about an exit strategy.
The same dynamic exists among significant shareholders at publicly listed CI Financial Corp. and AGF Management Ltd., and privately owned Connor Clark & Lunn Financial Group, Burgundy Asset Management Ltd. or Beutel Goodman & Co. Ltd., which is 51 per cent employee-owned. Acquiring any of these funds would make the buyer one of the largest players in a sector that’s increasingly focused on scale.
That brings us to the two other factors that will drive acquisitions in this space; disruption and changes in regulation.
Technology and innovations, such as exchange traded funds, are putting enormous pressure on management fees. Upstart firms, such as Questrade Inc., are trying to muscle into a sector with advertising campaigns that make consumers far more conscious of what they pay for performance that often lags benchmarks. Canadian regulators are also putting the spotlight on how fund managers get paid.
“It is going to be increasingly important for asset managers to be low-fee operators, particularly if regulatory changes result in ‘gatekeepers’ at distributors increasingly focusing on fees to decide what products are included on their shelf,“ said a recent report from analyst Geoffrey Kwan at RBC Dominion.
Flogging funds isn’t that different from marketing bread or beer. Consider how those sectors evolved. Ace Bakery was sold to Loblaws grocery store parent George Weston Ltd. In Ontario, John Labatt Brewing Co. Ltd. and Molson Coors Brewing Ltd. control the Beer Store outlets.
Jarislowsky Fraser’s co-founder decided the best way to sell more funds was to join forces with a bank, which can move products through everything from ATMs, websites and tellers to a highly trained, global institutional sales force. In announcing the sale of his 63-year-old business, Mr. Jarislowsky said: “With its existing distribution footprint, Scotiabank is uniquely positioned to preserve the legacy of our firm and enable the next generation of growth.”
And in the same way that Michael Jordan stayed wired into basketball by acquiring an NBA team after retiring as a player, Mr. Jarislowsky cut a deal that lets him continue to work at Scotiabank as he rolls through his seventh decade in finance. Cashing in while continuing to play the game is an increasingly attractive exit strategy for Canadian fund managers.
Andrew Willis