Wednesday, April 04, 2007

RBC's New Wealth Management Unit

Investment Executive, 4 April 2007

Royal Bank of Canada’s move to create a distinct wealth-management unit by merging its domestic, U.S. and global wealth-management businesses signals its intention to grab a greater slice of the affluent and high net-worth market.

“This is a true global wealth business that has a presence in all the major geographies in the world,” says George Lewis, group head of RBC’s new wealth-management segment. He was formerly head of Canadian wealth management for the bank.

Lewis says the change, which gives RBC four corporate segments instead of three, will allow the bank to co-ordinate its efforts in targeting affluent investors with more than $250,000 of investible assets and high net-worth investors with at least $1 million.

In Canada, the new unit includes full-service investment dealer RBC Dominion Securities Inc., RBC Asset Management Inc. — of which Lewis is chairman and CEO —and RBC’s trust services and discretionary investment-management business, which all shift over from the Canadian personal and business unit, now renamed Canadian banking. The bank’s in-branch advisory business and discount brokerage remain in the latter unit.

The wealth-management unit also includes U.S. full-service brokerage RBC Dain Rauscher and Royal Bank of Canada Global Private Banking, both of which shift over from U.S. and international personal and business unit, now renamed U.S. and international banking. The capital markets unit remains unchanged.

“RBC has a significant existing presence in wealth-management businesses [in Canada and abroad],” Lewis says. “We hope to accelerate our growth, but from an already solid position.”

Currently, earnings are almost evenly divided among the Canadian, U.S. and foreign wealth-management businesses, he says.

RBC is the dominant wealth-management company in Canada, with a 22% share of the market through DS. In the U.S., Dain Rauscher is the eighth-largest full-service brokerage. RBC also has 25 global private-banking centres around the globe.

In total, the new wealth-management unit had $561 billion in assets under administration and $158 billion in assets under management at the end of the first quarter of 2007, ended Jan. 31. The unit employs 3,500 advisors at DS and Dain Rauscher, and about 1,500 at the global private-banking centres.

“This is a concrete reflection of the importance of wealth management to RBC’s business,” says Keith Sjogren, director of strategy consulting at Toronto-based Investor Economics Inc.

Lewis says there are three main reasons for RBC’s decision to create the new wealth-management unit:

• RBC and most other financial institutions anticipate above-average growth rates for the affluent and high net-worth market in both developed and developing countries, compared with other financial services.

“As populations age and mature, we’re finding there is a demand, not only for assistance in helping clients grow their wealth but also in harvesting their wealth for cash-flow purposes, and then ultimately for transferring wealth to heirs,” Lewis says.

• Global wealth management provides strong recurring revenue streams, which only increase as clients’ portfolios build.

“It’s a business that doesn’t require significant balance-sheet capital from the bank to grow organically,” Lewis says.

• Globally, the market for affluent and high net-worth wealth-management business is still fragmented, with no one company holding more than 3% or so, Lewis says. This gives RBC the opportunity to expand in a business in which no single player dominates. He says the new unit has not set an overall target for market share.

Sjogren says that, while RBC probably won’t challenge the biggest players in the global wealth-management market — Switzerland’s UBS AG and Credit Suisse Group, Britain’s HSBC Holdings PLC and the U.S.’s Citibank Inc. are among the largest — the Canadian bank holds a strong niche position. “Its global private-banking business is well regarded,” he says.

RBC probably made the move, Sjogren says, to create a more efficient structure for its global business, pool learning and expertise from all countries, and develop new products. Lewis’s entry onto RBC’s executive committee also means wealth management will get a voice at the bank’s most senior level, Sjogren adds.

Lewis says he is focused on expanding the wealth-management business in all the countries in which RBC does business. The bank is specifically interested in “adding capability” and hiring more advisors in Britain. RBC currently has offices in London, Cheltenham and in the British Crown dependencies of Jersey and Guernsey.

Sjogren says RBC’s interest in building its British business is not surprising. “The British market has both domestic and international appeal,” he says. “It’s an attractive market itself and it’s a primary international financial centre.”

Lewis anticipates growth of the wealth-management segment will come both organically and through selected acquisitions.

In March, Dain Rauscher acquired New Jersey-based J.B. Hanauer & Co., a full-service brokerage specializing in fixed-income and wealth-management services with US$10 billion in AUA. That deal is awaiting regulatory approvals, expected in May.

On the organic side, the key strategy will be to add to RBC’s advisory force. Lewis says the wealth-management unit has specific targets for adding to DS, Dain Rauscher and RBC Global Private Banking, although he declines to give details.

“Particularly for the high net worth segment, it’s extremely important to offer world-class solutions from the perspective of products and services,” Lewis says. “The common theme across all our client-facing businesses in the wealth-management segment is the acquisition and retention of advisors, consultants and client-facing professionals.”

The move by RBC to create a global wealth-management unit is consistent with an overall strategy for the bank, as articulated recently by RBC president and CEO Gord Nixon: “We focus on operational effectiveness across all our businesses. Our integrated strategy will enable us to continue to generate very strong revenue growth and earnings.”

Lewis says the wealth-management unit’s strength, compared with its domestic competitors, is that it can leverage capabilities from RBC’s other business segments, primarily capital markets, which is a dominant player in Canada and which also has strength in selected international capital markets.

“Capital markets is providing [product] solutions that are attractive to our high net-worth clients,” he says.

RBC Asset Management, which now falls under the new wealth-management unit, continues to realize about 75% of its sales through the Canadian domestic branch network.

“We have the best of both worlds,” Lewis says. “We have a culture that supports client--facing professionals as they grow their businesses, combined with the strength not only of the RBC brand — particularly in Canada — but also the capability that comes with being part of a global financial institution.”