28 June 2005

Remember When TD's Discount Broker was Cutting Edge?

The Globe and Mail, Rob Carrick, 28 June 2005

A group of investors had a discussion on an on-line forum not too long ago about which discount broker they thought was best.

The debate was started by an individual who planned to make the move from mutual funds to stocks and was looking for some broker recommendations from people using the MoneySense.ca website. One person suggested BMO InvestorLine, while another mentioned CIBC Investor's Edge. ScotiaMcLeod Direct Investing received a couple of mentions, as did Credential Direct.

What about TD Waterhouse, the market leader? Not a single strong endorsement.

"I'm with BMO InvestorLine and would recommend them along with . . . Credential Direct, CIBC and Scotia," one participant in the discussion wrote. "No, I didn't forget TD."

There was a time when serious do-it-yourself investors almost invariably recommended TD Waterhouse and predecessor TD Green Line. So strong was the firm's market presence that it resembled Microsoft's grip on software.

Today, TD Waterhouse's Canadian service has declined into mediocrity. It's worth reflecting on this at a time when parent Toronto-Dominion Bank has just pulled off a deal to combine its U.S. discount brokerage operations with rival Ameritrade. The resulting company, to be called TD Ameritrade, is a top three player in the U.S. market that TD chief executive officer Ed Clark described as a "powerhouse."

Powerhouse is a word you would have used to describe TD Waterhouse back in its Green Line days when it had 70 per cent of the discount market, or when it was the first Canadian broker to introduce stock trading over the Internet. Today, Waterhouse is a glass house. Competitors have caught up and investors have noticed.

Consultant Greg Holohan of the Taddingstone Consulting Group said TD Waterhouse's current market share in Canada is nowhere near 70 per cent today. "The last time I looked at it, we pegged it at 50 per cent, and that was three or four years ago. Now, on the basis of total accounts, I'd say it's closer to 35 per cent."

The remainder of the market is split between another 11 or so discount brokers, which means that TD's position is still strong. But the days of being the acknowledged industry leader are done.

At the heart of things, on-line brokers are a just a conduit between individual investors and financial markets. The best brokers build on this service by doing things like adding financial planning tools, deploying technology to provide real-time updates of customer account holdings and offering a variety of ways to structure a stock trade.

At TD Waterhouse, the financial planning tools are negligible. Rivals such as InvestorLine, Investor's Edge, E*Trade Canada and even independent Qtrade Investor have added real-time account updates, but Waterhouse has not. RBC Action Direct, another giant bank-owned discount broker, also lacks real-time account updates, but then Action Direct was never the innovator that TD was.

InvestorLine and E*Trade Canada have introduced trailing-stop orders, which let investors protect their gains by having a stock sold when it falls by a predetermined percentage. The old TD Green Line would have had this, too.

TD Bank has had a lot going on in the past few years, so it's understandable that Waterhouse's Canadian operations have been neglected. The integration of Canada Trust was a huge task that the retail branch network is still perfecting, the bank has been building an advice-based business under the TD Waterhouse name, and negotiations over the U.S. Waterhouse operations have being going on for a while.

Still, TD's Canadian discount brokerage operation used to be standard-bearer. TD was among the first to set up a discount brokerage in Canada back in the mid-1980s (the actual first, by the way, was Quebec-based Disnat, which is owned by Caisse Desjardins), and it opened Green Line offices in places such as Australia, Hong Kong and New York.

It was back in 1996 that TD Bank spent $715-million to buy New York-based Waterhouse Investor Services and merge it with Green Line. Ironically, the Waterhouse name is exiting the U.S. market while living on in Canada, where it has zero history or meaning and recalls the pointless Americanization of a successful Canadian franchise.

It's hard to see TD Waterhouse going back to the Green Line name, but there are lots of other ways for the bank's discount brokerage to reclaim its former position. Sprucing up both the public and client websites would be a good start, as would the addition of real-time account updating and more tools for financial planning and selecting actual investments. TD could also tackle an area where most brokers are deficient, which is documenting for clients how their investments are performing over time.

Of course, TD could also continue to cling to its market dominance without making adjustments. General Motors can attest to the effectiveness of that strategy.

25 June 2005

Day Trading has Dried Up

Financial Post, Barbara Shecter, 25 June 2005

The day trader is dead. And his cousin, the active trader, is ailing. Certainly, the tales of quick trading profits in the thousands and even hundreds of thousands of dollars are no longer the centre of attention at parties; guests are more likely to be discussing their latest real estate gains or renovation projects.

Alan Fern, a philosophy major who left the University of Saskatchewan in the spring of 2000 for the bright lights of New York and a job as a day trader, hung up his keyboard 1 1/2 years later, along with legions of his former co-workers who watched the dot-com bubble burst.

He compares his early days at Broadway Trading Inc. to life in a college dorm -- but with the added benefit of making a lot of money during the dot-com trading frenzy in the 1990s. But by late 2001, stocks were no longer routinely rocketing up, sometimes $30 in a single day. In addition, the conversion to trading shares in decimal increments instead of fractions erased the spreads between the bid and asking prices for stocks on which many day traders depended for profit.

"Guys who were making a lot of money just the year before were losing tons of money," says the 35-year-old Mr. Fern. "There was a palpable fear. People either ran out of breath or got frustrated and fell off."

The precipitous decline in trading activity marked the beginning of a disturbing trend for the discount brokerage industry.

That, plus the lacklustre performance of stock markets, have pushed day traders and their active trading cousins, who didn't trade daily but did trade often enough to keep discount brokers happy, to the sidelines.

As a result, firms that once relied on the commissions generated by the frequent trades have been forced to shift focus dramatically to a new component of the market: wealth management.

Nowhere is that made clearer than in this week's US$9-billion merger of TD Waterhouse USA and Ameritrade Holdings Corp. Long-term growth for the new TD Ameritrade lies in development of the wealth-management segment, which provides a steadier income stream and gathers assets for long-term management, mitigating the reliance on the one-off trade commissions.

No one is more familiar with the dulled appetite of the active trader than Joe Moglia, the dynamic chief executive of Ameritrade, which was built in the bull market when it was hard to buy stock that wasn't going up daily.

"The day trader has, for the most part, blown up," Mr. Moglia said. "That business is gone."

But a more disturbing blow to firms relying on commissions generated from active trading is more investor are now thinking long term, Mr. Moglia said. Also, according to his research, traders are keeping an unusually large 15% of holdings in cash because of concerns about the price of oil, the direction of interest rates and the overall state of the economy.

"They're either on the sidelines or they're bears," Mr. Moglia said. "They like real estate better than stocks."

Where day traders once did as many as 400 transactions a day through Ameritrade, the company's most active traders might now do that in a year. On average, an Ameritrade investor now makes a measly 12 trades a year.

At TD Waterhouse, total trades averaged 93,500 a day in April, down 16% from March and off 26% from April, 2004.

Discount brokers including TD Waterhouse, Charles Schwab Corp., and Bank of Montreal's Harrisdirect have reacted to plummeting trading volumes with a series of margin-sapping price wars as they tried to hold on to market share.

But something more had to be done. From top players in the industry such as Ameritrade, to the second-tier players such as Harrisdirect, discount brokers have focussed on how best to recast the business to recapture the profitability of the early days.

One obvious answer is a merger, which allows combined companies to spread the fixed costs of administration across more trades.

This week's planned combination of TD Waterhouse and Ameritrade will create the largest online retail broker measured by the number of retail equity trades per day. As well, the deal promises more than US$370-million in cost savings.

But Mr. Moglia is unabashed in proclaiming another reason for the merger: his hunger for the substantial wealth-management component of TD Waterhouse from which he sees significant growth.

"It immediately put[s] us into the segment where the long-term investor exists and it makes us a player in the investment advisor market," Mr. Moglia told analysts on a conference call this week.

To hear Mr. Moglia tell it, wealth-management clients are to today's discount brokers what day traders were in the 1990s.

"There are 37 million households in the U.S. with income of between US$100,000 and US$1-million," says the former football coach who joined Omaha, Neb.-based Ameritrade at the height of the bust in 2001. "That's a US$12-trillion opportunity."

His mission originally was to boost the company's fortunes through a series of acquisitions of active trader businesses to cut costs and boost margins. Now he's looking to break out of that finite game, something TD Waterhouse was already on track to do.

"The active trader space has a fixed number of people who will be in it," Mr. Clark said. "It'll go up or down depending on the froth of the market, but it's not going to grow any faster than the population."

Wealth management, on the other hand, provides "an above-average growth space" because of the bulge of ageing Baby Boomers headed for retirement, he said.

TD Waterhouse has been targeting wealthy investors who aren't wealthy enough for the full-service brokers. This group has more than $500,000 but less than $1-million to invest. Investors who want a little advice before investing in stocks and bonds online can get it from one of about 2,600 financial advisors in more than 140 retail branches across the United States.

The bigger plan is to offer levels of service at different price points: from simple online portfolio management and asset allocation tools to full investment advice (albeit without the tax and estate planning).

TD Waterhouse has also drawn in independent financial advisors who left big firms to strike out on their own, offering them access to the discount brokerage's trading facilities and back office. The company has built up US$38-billion in assets through this business, while Ameritrade's fledgling wealth-management business has just US$4.1 billion in assets attached to registered advisors.

TD Waterhouse set the stage in the late 1990s to extend its expertise in wealth management to its discount broker, aided by some key acquisitions that boosted branches and advisors.

Others have jumped aboard more recently, in an attempt to improve their fortunes.

Harrisdirect, which is about one-sixth the size of TD Waterhouse, has turned in disappointing returns since Bank of Montreal bought the business from Credit Suisse First Boston in late 2001 and combined it with an existing direct investing business.

Late last year, BMO set out to turn the business around. In addition to simplified pricing of $7.95 a trade, a large part of the transformation is a focus on wealth management.

Harrisdirect is rolling out a "guided investment model" that will offer various levels of investment advice and tools at different price points. Clients can access basic advice to set goals and allocate assets according to model portfolios. They'll pay more if they want help selecting investments through proprietary models, recommended lists and portfolio construction tools. The full package includes portfolio management assistance through alerts and reports on performance.

At a conference in Chicago this month, executives from BMO and Harrisdirect played up the connection between the bank and the discount broker. Since both are already in wealth management, online portfolio management tools can be created to tap into expertise without a substantial increase in costs, they said. But some company watchers say pressure from the much-larger TD Ameritrade will result in the sale of Harrisdirect for as much as US$500-million before it reaches any of those goals.

E*Trade Financial Corp., the New York-based discount broker that sped up industry consolidation this summer with a hostile bid for Ameritrade, has taken a different approach to minimizing reliance on trading commissions. It started an online bank.

A source close to the TD-Ameritrade negotiations said the online banking unit, now a substantial part of E*Trade's operations, played against it in the three-way merger contest because online banking is not as prized as wealth management.

E*Trade could still try to break up the TD-Ameritrade marriage. But industry players say a more likely scenario is a merger with Schwab, which has become a big player in wealth management.

24 June 2005

Ameritrade & TD CEOs, a Brokerage Odd Couple

Different men claim similar standards

The Globe and Mail, Sinclair Stewart, 24 June 2005

Effusive doesn't begin to describe Joe Moglia. Two days ago, during a conference call to unveil his company's $2.5-billion (U.S.) deal with TD Waterhouse, an analyst jokingly thanked the Ameritrade Holding Corp. chief executive officer for not cursing him in Italian after he asked a question. A giddy Mr. Moglia couldn't resist the temptation to oblige, unleashing an incomprehensible string of sentences that left puzzled listeners scratching their heads.

As it turns out, he wasn't cursing at all. He was serenading the analyst with a love song that begins: "Your eyes shine like the stars."

"I don't speak Italian, but I remember the words to that song," explained Mr. Moglia, a 56-year-old New Yorker who spent 16 years as a college football coach before finding his way to Wall Street. "I'm sure I pronounced all the words wrong."

It's difficult to know just what was going through Ed Clark's mind as he sat through this offbeat improvisation. On the surface, the blunt-talking, buttoned-down CEO of Toronto-Dominion Bank is the antithesis of Mr. Moglia, and together they look like the discount brokerage industry's own odd couple.

But Mr. Moglia is convinced they have enough in common to make their marriage work.

"Whether it's been my 21 years on Wall Street or whether it's been my 16 years as a coach, any real success I've had is because I've made good bets on people. So you put the right people in the right slots, everybody knows what our objective is [and] let them go," said Mr. Moglia, adding, with his penchant for gridiron metaphor, that he is capable of the occasional Knute Rockne speech to motivate his charges.

"That's frankly very, very, similar to what's Ed's philosophy is -- that's part of the reason we get along."

On Wednesday, they announced a deal to fold TD Waterhouse into the operations of Omaha, Neb.-based Ameritrade and create the world's No. 3 on-line broker in assets and customers.

Mr. Moglia will run the show as head of the combined TD Ameritrade, while TD will exert its influence from the sidelines as the company's largest single shareholder. The bank will take a 32-per-cent stake once the deal closes at the end of this year, and then immediately increase it to 39.9 per cent.

For both men, this was a long time in coming. Ameritrade reached out to TD about a potential partnership in the fall of 2002, and since then the talks have flickered on and off. The lengthy courtship, however, has given them a chance to get to know one another.

Mr. Moglia concedes he is probably a little "louder" and more animated than Mr. Clark, and acknowledges their styles contrast somewhat. But he says they have similar standards and expectations, two traits that often manifest themselves as toughness.

Mr. Clark, not exactly a shrinking violet, offered some plain words on Mr. Moglia's tough negotiating style when asked whether TD had effectively wrested control of Ameritrade by taking a large minority chunk of the company.

"You have no idea what a son of a b*tch Joe Moglia is, so I don't think that's true," Mr. Clark joked in an interview while the Ameritrade boss was with him.

Mr. Moglia's extroverted, often cheery demeanour belies his hard-nosed ethic. His accent still betrays his roots as a streetwise kid growing up in a rough-and-tumble area of Manhattan's Washington Heights, where he once ran with a gang.

He helped coach a high-school football team to put himself through college, and then turned it into a lengthy career once he graduated, even writing a book on the subject. It wasn't until 1984 that he joined Merrill Lynch & Co. as a broker, eventually overseeing the firm's investment products division before departing to Ameritrade in 2001.

As unconventional as his style may be -- he has used other conference calls to offer up his predictions on the SuperBowl -- his success at acquiring companies for Ameritrade and his reputation as a turnaround artist is likely one of the main reasons TD chose to do this deal, industry observers suggested.

Mr. Clark is a big believer that successful foreign acquisitions depend on strong management, and Mr. Moglia has a proven track record on his last seven deals, including the purchase of Datek Online Holdings Corp. in 2002.

Indeed, his continuation as Ameritrade's CEO was one of the conditions TD stipulated when it began merger talks. Mr. Moglia had been planning to retire, possibly as early as this fall, and said he would have likely followed through if the TD Waterhouse transaction hadn't occurred.

"He's extremely well-liked by investors," said Richard Repetto, an analyst with Sandler O'Neill & Partners in New York. "He's a straightforward guy. He's sort of a guy's guy."

He is also seemingly tireless. After announcing the TD Ameritrade merger, he stayed up until 3 o'clock in the morning, answering more than 100 e-mails and a few dozen phone messages. He was up a few hours later, speaking with a phalanx of reporters and selling his merger to the television cameras, which he does with evident enjoyment.

This was a three-way fight, after all, and if you believe the analysts or the stock charts, Mr. Moglia has emerged as the victor.

E*Trade Financial Corp. would be the loser. The rival firm launched a hostile $6-billion offer for Ameritrade last month in an effort to disrupt its merger with TD Waterhouse.

Ameritrade rejected the bid late Tuesday night, but Mr. Moglia admits he was in an enviable position with two deals to choose from, despite the added distractions. Many speculate the involvement of E*Trade forced TD to substantially sweeten its deal, and cough up an extra $400-million to help pay a special dividend for Ameritrade investors.

"[We] did have two good offers on the table. Both gave us good [synergies], both enhanced our profitability, but at the end of the day the TD opportunity was a better long-term fit strategically," he said. "And it also turned out to be a better financial deal."

Mr. Moglia will now preside over a company with $1.8-billion in annual revenue, $219-billion in customer assets, and 239,000 average daily trades, the most active trading base in the industry. Unlike E*Trade, TD Waterhouse also gave Ameritrade access to more than 140 branches and a stable of investment advisers, something the U.S. discounter was seeking as a means of expanding beyond its traditional niche as a low-cost trading platform.

Mr. Moglia refuses to speculate on how long he will stick around at TD Ameritrade, other than to say he is committed to remaining as CEO, and perhaps even taking a run at some other targets in the thinning ranks of discount brokers.

Beyond that, he says he still has an itch to reconnect with football, only this time, he has his eyes on the pros.

"It might be fun one day to combine the skill sets and the experiences of what I learned as a business person and what I learned in football," he said. "If it's football and business, it would probably have to be something associated with the NFL."

Scouting report

Joe Moglia, who is set to take the reins of TD Ameritrade later this year, will lean heavily on his football coaching experience to guide the world's No. # discount broker. The Ameritrade CEO has developed a unique leadership style that draws as much from the locker room as it does from the boardroom.

Age: 56

Vital Stats: 5 feet, 11 inches

Current Position: CEO, Ameritrade Holding Corp.

Experience: 17 years at Merrill Lynch & Co.; 16 years as a football coach, including two seasons as defensive co-ordinator at Dartmouth College.

Awards: Two Ivy League Championships

Education: BA in economics, Fordham University, Masters in secondary education and social sciences, University of Delaware

Books: Coach Yourself to Success: Perimeter Attack Offense

Hero: Vince Lombardi, legendary coach of the Green Bay Packers

Birthplace: Washington Heights, New York City

Current residence: Omaha, Nebraska

Family: wife Amy, four children, two stepchildren, and three grandchildren

Career aspirations: Running TD Ameritrade; possibly a job with the National Football League that combines his business and gridiron experience


"Whether it's been my 21 years on Wall Street or whether it's been my 16 years as a coach, any real success I've had is because I've made good bets on people."

"I think I can be very, very motivating...There are Knute Rockne speeches in me."

Cult of Ed Clark

He was a reviled Trudeaucrat who made a dumb decision to head a shaky trust company. Now, at rebounding TD, Ed Clark is the banker who walks on water

The Globe and Mail, Sinclair Stewart, 24 June 2005

Michael Walker had already grown disillusioned with working in government when he met Ed Clark in 1974. The way he saw it, Ottawa was being overrun by a new breed of civil servants, young idealists hell-bent on meddling in the economy. Clark might as well have been their poster boy.

Clark had arrived that year in the nation's capital armed with a Harvard PhD in economics, a cocksure mien and a collection of hideous neckties. He bore little outer resemblance to the man known today as the chief executive officer of Toronto-Dominion Bank. Of all the attributes of this younger Clark, it was the whiff of left-leaning politics that irritated Walker, then a consultant with the Department of Finance. Still, this upstart made Walker feel good about one thing: his decision to quit his Ottawa job and co-found the Fraser Institute, the think tank that, appropriately enough, has since grown into the bogeyman of the left/liberal Canadian intelligentsia that Walker resented.

"My brief conversations with Ed, and the knowledge of where he was coming from, was kind of like the last straw," Walker says. "I thought, if these are the bright young people who are coming in [to the federal government], we have got a problem."

Walker pauses for a second, relishing Clark's journey from dirigiste civil servant to the head of Canada's third-largest bank. Then he exhales a smug chuckle. "What he shows you is that redemption is always possible."

Like other references to his supposed political stripes, this anecdote makes Clark wince. He is sitting in a corporate box at the Air Canada Centre, balancing a plate on his lap and half-interestedly watching the Toronto Raptors absorb another beating.

"You know," he says wearily, spearing a sausage with his fork, "I don't really care what the chattering classes think."

Clark's annoyance belies that statement. It's been two decades and several high-ranking private-sector jobs since Clark left Ottawa, and he still can't shake this burr on his résumé. People remain fascinated by the idea of a Big 5 bank being headed by "Red Ed," the derisive nickname Clark earned from oil executives after helping to craft the National Energy Program under prime minister Pierre Trudeau. Clark can't quite figure it out. "I think this is a dead issue," he says. "It's only in the press."

Indeed. All the stuff about Red Ed, and likewise Walker's notion of Clark's redemption, only faintly illuminate the larger fact: Clark is the most improbable CEO on Bay Street. A bank chief who learned his management chops as a mandarin. Who vaulted into his current perch by pulling a boner move in his first attempt to breach the executive suite. Who worries that he makes too much money. And who became arguably the Street's most popular CEO not just via predictable means--by turning around results at his company in the 2 1/2 years that he's been in charge--but also by simply telling it straight in a climate that's glutted with hype. Ed Clark is congenitally unable to oversell.

A couple of months ago, at an investor presentation in Toronto, Clark joked with the audience that he was the cup-half-empty guy, while Bill Ryan, the head of TD's recently acquired U.S. operation, Banknorth, was the cup-half-full guy.

"Together you'll get a balanced representation," he deadpanned.

Growing up in a Toronto suburb, ED clark was surrounded by very smart people. His father, Samuel Delbert Clark, who died in 2003, is regarded as the dean of Canadian sociology, a strain of the discipline that inclined more toward historical perspective and less toward number-crunching than the American school. The founding chairman of the sociology department at the University of Toronto, Del Clark studied social change--political protest, urban poverty and the like--and over time changed his politics from leftist to Liberal. Clark's mother, Rosemary, taught economics at college and edited Del's books. It was her footsteps that Ed traced after completing a bachelor of arts degree at the University of Toronto in 1969. He enrolled in a master's program at Harvard that same year, and remained there for his doctorate, moving to Africa to complete his dissertation on the economic strategy of Tanzanian president Julius Nyerere. Socialist Development and Public Investment in Tanzania was circulated in the oil patch following the implementation of the NEP as proof of Clark's revolutionary leanings. He says his critics have never read the thing. If they had, they'd know it wasn't a socialist tract, but rather a study of socialism.

The family's academic streak is wide. Clark's brother, Samuel, is an academic, as is his brother-in-law and mother-in-law. His wife, Fran, has a doctorate in psychology. That's also the degree one of their two daughters is pursuing in Denver. (They also have two sons.) Understandably, it came as a shock to Clark's parents when he turned down a professor's job at ne-plus-ultra Harvard in favour of joining the Canadian government. For Clark, the decision was simple: He thought he would make a terrible academic.

"Probably my best ability," he says, is to take something complex "and put it in a way that the average person can understand. That's not a particularly good ability for an academic."

Clark joined the Department of Finance as chief economist in 1974. After a series of moves, he earned responsibility for a portion of the Anti-Inflation Board. The highly interventionist program was contentious: Ottawa was capping wage and price increases to combat the spiralling cost of housing and commodities. For Clark, the job was an epiphany: He liked managing people (150 of them) and, what's more, he was pretty good at it. So much so that he would be named Canada's civil servant of the year in 1982, at the tender age of 35.

"Ed was the best manager of anyone in our age cohort," says Brian Levitt, who worked with Clark in Ottawa and is now co-chairman of law firm Osler, Hoskin & Harcourt LLP. "He had a knack for taking a group of people and getting everybody to do the most they could do. He's a challenging guy to work for because he's on top of the file, so you can't slide by him with generalizations. It's a standard of: Do you know what you're talking about?"

Clark says most corporate leaders don't realize that a job managing government staffers is more complex than a private-sector equivalent. "Can you imagine," he asks, "running a large organization where you can't fire, you can't hire and you can't reward people, and yet you have to motivate them to work extraordinarily long hours?"

Clark's Ottawa days will forever be linked to his role in drafting the NEP in 1980. It was an effort to give the government greater control of the energy sector and, by extension, a greater share of its profits. The West viewed this tithe as barely veiled theft, and Clark, who at the time was an assistant deputy minister of Energy, Mines and Resources, became a lightning rod for criticism.

"I don't think Ed would have been attacked nearly as much if the business community didn't regard him as a very formidable foe," says Senator Michael Kirby, a onetime senior Trudeau aide who has known Clark since the mid-'70s. "It was a tribute, in a sense, to the guy's competence that people thought he was the bête noire in this whole thing."

During the NEP imbroglio, Kirby was himself impressed that Clark kept his underlings focused and loyal, despite the torrent of abuse he endured from Western Canada. "Ed is not one of those guys who is going to run for cover when the going gets tough. Ed is going to hang in there."

Of course, you can't hang in once you've got your walking papers. The Mulroney Conservatives handed them to Clark in 1985, shortly after being elected. Clark's next stop, surprisingly, was Bay Street.

John Pelton remembers getting a fateful phone call from Ed Clark in the summer of 1988.

Pelton and Clark had become close during the year they'd worked together in investment banking at Merrill Lynch Canada, cutting deals and making a good deal of money. One of their shared mantras, scribbled on a sign in their offices, was "Don't hire children." Clark likes to joke that this rule immediately eliminated 70% of Bay Street.

On the day of Clark's call, Pelton was visiting family in Manitoba. Clark rang to tell him that a headhunter had approached him about becoming CEO of Financial Trustco, a struggling conglomerate run by the flamboyant (and now-deceased) Gerry Pencer. Clark had decided he was going to accept, on condition that Pelton come too.

"How long do I have to make up my mind?" Pelton asked.

"A couple of hours," Clark replied before hanging up the phone.

That was all the time Pelton needed. After a quick conversation with his wife, he jumped on a plane to Toronto and met Clark at Pencer's offices. The two friends signed on--Clark as CEO, Pelton as president and chief operating officer.

It was a bold move. But then, Clark already had turned more than a few heads with his seamless transition to the private sector. He insists he was never much of an investment banker, but that isn't entirely accurate. Financiers are often only as good as their connections, and among the many things Ottawa provided Clark was a coterie of influential friends. One of these, Mickey Cohen, was Clark's boss during the NEP battle. (He's been a TD director since 1992.) Cohen, who took an executive job at the Olympia & York empire, got Clark a meeting with the company's owners, the powerful Reichmann family. Merrill was soon tapped to lead O&Y's acquisition of Hiram Walker Group, and to underwrite a $500-million financing for Gulf Canada Resources, an O&Y subsidiary.

Clark was restless, though. He wanted to be an operator, and he believed he had the management skills to run a large company. Yet he also knew his government experience wasn't going to pass muster in the private sector. He had something to prove, and that compulsion made Pencer's offer irresistible.

Financial Trustco was widely viewed as a mess, a career-wrecker in the making. Pencer had assembled a mishmash of interests in the mortgage, investment and insurance industries, along with a list of heavyweight creditors who were beating on the company's door following the stock market crash of 1987.

Purdy Crawford, who was then CEO of Imasco Ltd. and knew Clark from the latter's Ottawa days, could see that the Pencer agglomeration was in shaky condition. He attempted to dissuade Clark over a lunch in Toronto.

"I said he had to be in a position of strength, that he didn't have to take orders from Pencer," Crawford recalled. That caveat was the mildest one Clark was offered, he says ruefully. "Every human being I knew said, 'Are you completely out of your mind?' "

Heedlessly, Clark bolted in. He discovered, to his horror, that things were even worse than the Cassandras had said.

There was little choice but to dig in. He had earned a reputation in Ottawa as a consensus-builder, and he relied on both that experience and his connections to bring regulators to the bargaining table and buy enough time to unwind Financial Trustco methodically. At the same time, he struck deft agreements with lenders and managed to sell off scattered bits of the company's holdings.

It was a nerve-jangling exercise, but it earned Clark his stripes. Peter Maurice, the CEO of Canada Trust, had had dealings with Clark during his Merrill Lynch days, and now he admired how the young executive was orchestrating a soft landing for Financial Trustco investors. Maurice quickly persuaded Clark to come to Canada Trust as his heir apparent.

After learning the retail ropes under Maurice, Clark took on the chief executive mantle at Canada Trust in 1994. It was here that Clark developed his reputation as a straight-ahead branch-banking operator, proving that he could produce results at a large, publicly traded organization--one competing against the big banks, no less.

Canada Trust was known for its innovations in customer service, like the 12-hour banking day. But its focus had begun to fade when Clark took over. Accordingly, he combined its real estate portfolio with that of another company, scaled back its auto-financing business and plowed resources back into branch banking and brokerage operations. He quickly steered Canada Trust away from riskier corporate finance and restored the emphasis on retail. A U.S. subsidiary was auctioned off, and a Canadian property and casualty insurer was added to the fold.

By the time TD CEO Charlie Baillie came calling with a takeover offer in 1999, scooping up Canada Trust in a landmark $7-billion deal, the reinvention of Ed Clark was almost complete. All because of stubbornness, skill and--most importantly--a timely dose of stupidity.

"That's why I'm running the TD Bank," Clark says. "Because I actually took the completely dumb decision to go to Financial Trustco. Objectively, you've got to admit that was the dumbest decision in the world."

Ed Clark may be an unusual banker, but he still looks like a banker, of course: The requisite pinstriped suit is draped over his lanky frame; the outré neckwear has given way to conservative choices and wire-rimmed glasses frame a still-boyish face.

Yet old habits die hard. Clark may have left Ottawa, but he retains his aversion to the rubber-chicken circuit and all the other glad-handing sessions that are part of his job description. Although he's recently taken up golf, managing to squeeze in a dozen rounds a year, Clark doesn't get out much for someone in his position. And when he does, he's not the life of the party.

"I'm not good at small talk," he says, and then corrects himself: "I'm miserable at it as opposed to not good. I'd rather go home and drop in and see my daughter and hold my granddaughter. Also, I married someone who has no interest in [the social circuit] too."

Clark not only lacks the desire to keep up with what can be a brutalizing schedule of receptions and dinner parties, he also lacks the vigour. Ten years ago, he had heart-bypass surgery. He is also a survivor of prostate cancer, but insists--rapping on the side of his head for good luck--that his health is good. Ever since the heart operation, Clark has been careful to get a good night's rest, and he religiously follows a four-days-a-week workout regime. Not for him the marathon hours that are many a dealmaker's badge of honour.

When Clark does emerge from the chrysalis of family and work, it's usually to participate in charities, a subject that he feels conflicted about discussing. He's allergic to self-aggrandizement but compelled, as an influential CEO, to lead by example. His donations typically fly below the radar screen: He funded a chair at the University of Toronto in his father's name, and another at University Health Network in his cardiologist's.

The charity he is most closely involved with is Homeward Bound, a project designed to help 30 single mothers who have been reduced to living in shelters. They get housing and education, and finally, a job. Clark and his wife gave $1 million to kick-start the effort, and if it bears fruit, he says he'll give another million to expand the program. Would that more people would feel so inclined.

"I'm shocked at how little well-to-do people give away," he says. "And how people who are earning vast sums of money don't feel there's some obligation to use that money for [something] other than to acquire goods.

"I mean, what toy could I possibly acquire that would give you the same sense of satisfaction as when you take 30 women, who literally have been f*cked around by men, and transition their lives so that they and their children's lives aren't on welfare?"

Clark can afford it. He was among the top earners in the country (see page 81), bringing in $8.6 million in compensation last year alone. As of the end of last year, he owned nearly $35 million worth of stock in the bank. The money doesn't make him feel guilty, exactly, just awkward.

"Nobody can earn as much money as I earn without sitting there and asking, 'Is this morally right or wrong?' It's hard to sit there and say, 'Why don't you pay me half my market value?' Maybe that's what I should do. But I tend to say, 'Judge me by what I do with my money as opposed to what I earn.' "

It's hard to overestimate the impact of such frankness in the banking world. In 2002, just before Clark was set to take the TD reins from Charlie Baillie, the incoming CEO held court with analysts during the bank's fourth-quarter conference call, presenting a brief manifesto.

"I want to start off by saying I don't want to be in the forecasting business," he said. "I find the world far too complex for me to predict and I don't find that forecasts from me have been particularly helpful over the past year. ...I'm also not in the stock-valuation business. I'm going to leave that job to you."

Clark's willingness to lay out the ground rules, resolutely and unapologetically, struck a chord. In the hazardous world of stock prognostication, where science and guesswork are often given equal weight, here was a bit of certainty: The investment community could count on Clark to deal with them straight.

"It was an amazing presentation," recalls one analyst, who could almost quote the speech verbatim three years after the fact. "He's the first one to tell you when there's a problem--not the last one. That sets him apart from the other bank CEOs. When you talk to Ed, there's not a lot of spin."

Clark has since become almost bulletproof in the investment community, spawning what some on the Street have begun referring to as "the cult of Ed." Of course, the esteem stems partly from Clark's getting the bank right side up: Its bottom line improved 115% in the past year alone, while its Top 1000 profit ranking climbed from 19th place to sixth (see page 44).

"If I've got a problem with the stock, it's that everyone agrees with me that Ed's a great manager," confesses Murray Leith, the director of investment research at Vancouver brokerage Odlum Brown. "He does walk on water in a lot of people's minds, but that to me is a bit of a worry, because everybody's fallible."

Clark himself is ill at ease with his popularity, in part because he knows how fickle the market's adulation can be. One major investor recently told Clark he'd sell TD's stock if he ever saw him grace the cover of a magazine.

"I really dislike personality cults," Clark declares. "I'd have to ask my psychiatrist why that is. I guess I'm just not of a leadership style that says it's all about me."

In truth, much of Clark's reputation is owed to a record that to date has been largely janitorial. TD was in bad need of a mop-up when he took over. It had made some dicey bets on the telecom and media sectors, so when the credit picture darkened, it was forced to write off billions in bad loans. The charges produced a year in the red, the first time since the merger of the Toronto and Dominion banks in 1955.

The timing was exquisite for a retail banker like Clark. The entire banking sector had been scorched by the meltdown in corporate credit, prompting an industry-wide shift away from the unpredictable performance of investment banking and back to what has always made Canadian banks buckets of cash: plain old boring branch banking.

Clark quickly identified $11.2 billion worth of loans to be lopped off the bank's portfolio. He shored up TD's ability to make deals by nursing its balance sheet back to enviable health, aided, he readily admits, by a beneficent reversal in the credit cycle. And he quickly absorbed some punishing charges to stop the bleeding at TD Waterhouse, the bank's discount brokerage, by slamming the door on some of the unit's money-losing international operations.

TD might be the best turnaround story in the sector, but even Clark's loyal following--nine of the 13 analysts who cover the stock have a buy recommendation, and no one has a sell--hasn't yet turned the bank into a darling. The stock is up about 50% since he was named CEO, but that's partly because it was languishing in the gutter around $34 when he came on the scene. Today, its price-to-earnings multiple is still dwelling near the bottom of the bank heap, meaning investors are unwilling to afford it a premium valuation.

Clark preaches that "E drives the P"--earnings drive prices. Consistent profit growth will eventually convince investors to push the stock to higher levels. Yet perversely, the candid Clark style that won over the Street is also one of the reasons the stock has not climbed further. Every quarter, prior to TD's conference call, the bank's senior executives chew over this problem of Clark's refusal to play cheerleader.

"We have a big group inside that says, 'Ed, you overdo it, because in a context where 90% of the population oversells and you are underselling, they're not going to understand that you're underselling. And so you're actually going to hurt us--you're not fairly representing us.' My problem is--call it a failure of leadership, or whatever--I can't do otherwise. You are what you are. The last thing I'm going to do is overpromise and underdeliver."

But it's more than a personal quirk, it's a conviction. "That's the biggest danger in an organization--lack of candour," Clark says. "All the great military disasters--why did they all occur? Because someone didn't come and tell the general, 'You're out of your mind.'

"If I have a thing that I hammer away and hammer away on in every situation I've ever been in, it's transparency. Bring me the bad news. I won't yell at you. The only thing I will get upset with is if I discover you've been sitting on bad news."

Clark isn't known for flashing a temper. But that doesn't mean he doesn't make employees nervous. He works closely with his senior managers--something that can be interpreted as controlling--and has little patience for poor results. Baillie, by contrast, was more aloof, less of a hands-on operator, says a former TD executive who worked under both men. "Most of the people who work for Ed live in fear of him," the banker says. "Because if you cross him, he'll cut your nuts off. He's always thinking three moves ahead in terms of people."

Several high-profile departures have occurred since Clark's arrival, some coincidental and others because executives didn't mesh with the new CEO's plans, or had been passed over for his job. Frank Petrilli, the long-time head of TD Waterhouse, retired. Don Wright, who headed up the investment banking arm, TD Securities, followed his mentor Baillie out the door. Andrea Rosen, who ran the retail bank branch network, the spine of the organization, took a year of family leave at the beginning of this year. She won't be coming back to the same post: She was replaced by the team of Bernie Dorval and Tim Hockey. Both came from Canada Trust, giving credence to the idea that the merger with TD was something of a reverse takeover.

To hear Clark tell it, this is not a case of the executive suite being cleared of all future pretenders to the crown. He knows he needs help.

"I'm not a brilliant strategist, I'm not really an innovator," he maintains. "I'm not the world's smartest human being by a long shot. It's not obvious that I'm even above average." (This is standard Clark schtick, always delivered with a grin.)

"Having grown up in an academic family, I'm not afraid of smart people. If you're not smarter than me, why would I hire you?"

The turnover, however, means that some unit heads have little experience in their new roles. That, in turn, prompts a more pressing question: Who can take over for Clark once he decides to leave? There's no clear answer, and it's a concern that analysts hear frequently when they meet with large institutional investors, who are not unmindful of Clark's previous health problems.

Clark, who is 57, acknowledges it's a valid point. Meantime, he figures he's got another five to seven years of work left.

A lot of the work will be south of the border, carrying through on one of TD's most ambitious moves in recent memory, the $5-billion acquisition of Portland, Me.,-based Banknorth Group Inc., announced in August of last year.

When one public company says it plans to shell out a wad of cash to buy another, the stock of the purchaser typically goes down, and the stock of the target goes up. This is Economics 101.

And this acquisition carried more than the usual risks. Clark was making a bet on the United States, a charnel house for the expansionist dreams of many a Canadian banker. TD's stock should have tumbled, if not tanked. But one day afterward, it was trading higher than before the news.

Of several reasons for the stock's stubborn refusal to drop, the most important was that the market was willing to give Clark, Mr. Candour, the benefit of the doubt. That's a gesture it wouldn't have extended to John Hunkin, at Canadian Imperial Bank of Commerce, or Gordon Nixon, head of Royal Bank of Canada, both of whom have experienced varying degrees of failure south of the border.

Of course, trust can be a fickle thing in the markets, and Clark, on the cusp of a major foray into the U.S. market, now has to deliver.

"The jury is still out on [Banknorth]," says Len Racioppo, president of Jarislowsky Fraser Ltd., an institutional money manager that is TD's largest institutional shareholder. But he credits the move as "emphasizing traditional retail branch banking, as opposed to running out and trying to capture earnings and gains from the capital markets."

Instead of buying the entire bank outright, TD purchased just 51%, and retained the option to continue increasing its stake over time. This both limited the amount of cash it had to spend up front and kept Banknorth's shares alive for future acquisitions. The latter aspect is crucial: When Canadian banks try to fund U.S. deals with their own shares, they are usually dumped back into Canada at a discounted price by large American investors, a phenomenon known as "flow-back."

With the Banknorth shares, TD gets to have its cake and eat it too. This is one of the reasons the deal generated some dissent among Banknorth shareholders. If Banknorth's stock declines, TD can increase its stake more cheaply. If the shares rise in value, they become a more valuable currency with which TD can make acquisitions.

Even if Banknorth proves itself to be a shrewd pickup, it is still just one plank in a more ambitious strategy. TD has signalled it is now on the hunt for further purchases in Massachusetts and metropolitan New York to solidify its presence on the northeastern seaboard.

This is where the risk occurs, and it is one of the chief reasons that the market is still hesitant to give TD's stock a premium multiple.

"Ed's in a pretty interesting predicament," observed one analyst who follows the bank. "To make the first deal work, you have to make other ones, and you probably have to do them in a relatively short order."

Much of the blame with Royal Bank's poor results in U.S. retail banking has been chalked up to micromanagement: The feeling is, Royal Bank executives thought they could run their North Carolina operations from the safety of Toronto, despite their lack of knowledge about what has turned out to be a very different market.

Clark wasn't about to make the same mistake. While he never takes direct swipes at his competitors, and downplays the extent to which he looks over his shoulder at the other banks, he repeatedly--some would say painfully--stresses that TD's strategy in moving into the United States is to look for strong local management who are capable of sniffing out opportunities and propelling TD's growth.

That's all well and good, but it poses a problem: Investors have faith in Clark, but the man looking for purchases--Banknorth head Bill Ryan--remains a relative unknown on this side of the border. Of course, Clark will be vetting any major acquisitions, but if he edges too far in this direction, he'll merely be replicating the same kind of behaviour that many believe got Royal Bank into trouble.

Clark's other stateside play is up in the air. He tried--and failed--to strike a $10-billion megamerger that would have combined TD Waterhouse's U.S. operations with E*Trade Financial Corp., but the deal fell apart because the parties couldn't see eye to eye on who would run the company (as one wag put it, E*Trade CEO Mitch Caplan wanted to keep his job).

Now Clark is at it again, with a different partner. At press time, he was finalizing a deal with Ameritrade Holding Corp. that would see the two sides combine their on-line brokerages. It appeared TD would take a minority stake of around 30% to 35%. The market was mesmerized by the advantages of a merger: hundreds of millions in cost savings, increased earnings power and the scale to go toe-to-toe with heavyweights like Charles Schwab Corp.

But this gambit is as much about Banknorth as anything else. Clark may insist that he likes the discount business, but he likes retail banking a lot more. Merging TD Waterhouse strips more than $1 billion in goodwill from the books and frees up significant capital for further retail acquisitions in the U.S. This is the real endgame. A marriage with Ameritrade could be the first step in Clark's surreptitious exit from a declining sector.

Timing in this business is everything, and Clark need only look at his own rise to the top of TD as a reminder. Baillie was highly respected in the industry, yet he left under the stain of TD's first-ever annual loss, apologizing to investors for the embarrassing mishap with soured loans, and essentially falling on his sword so that Clark's tenure would begin with a clean slate.

For all the current faith in Clark's management style and strategy, he will ultimately be measured by the things he hasn't yet done: making further U.S. acquisitions, resolving the discount brokerage conundrum and managing domestic bank mergers (assuming the government ever makes up its mind on whether to allow consolidation).

Clark hopes to be remembered as a great leader, but, he says, "I'm not big into legacy things. I don't want to sound gruesome, but when I'm gone, the ants will be eating the body away and I won't feel a thing, right?"

Spoken with candour.

23 June 2005

Analysts Raise TD Stock Targets on Ameritrade Deal

Reuters, 23 June 2005 12:55 PM ET (In U$ unless noted)

Toronto, June 23 (Reuters) - Analysts gave a broad thumbs-up on Thursday to Toronto-Dominion Bank's sale of its Waterhouse USA unit to Ameritrade Holding Corp. , a deal that will give TD a hefty stake in a top player in the competitive discount brokerage industry.

The deal, announced on Wednesday, will give TD a 32 percent interest in the $9 billion merged company in exchange for a Waterhouse USA franchise that had struggled with weak profits and softening trading volumes.

TD plans to raise its stake to 39.9 percent when the deal closes in about six months. The combined entity, to be called TD Ameritrade, is expected to have the highest trading activity in the industry.

Brokerages were quick to raise their 12-month target prices for shares of TD, Canada's No. 2 bank by assets, with some characterizing the deal as TD purchasing Ameritrade, rather than selling Waterhouse.

"In our view, the real way to look at this transaction is that TD stands to acquire virtual control of Ameritrade, gaining a highly regarded operating management team, which also has a strong track record at integrating acquisitions," said Desjardins Securities' analyst Michael Goldberg.

The deal comes just months after TD closed its acquisition of a majority stake in Maine-based Banknorth Group Inc., giving the bank a foothold in both the U.S. wealth-management and retail-banking markets.

"Strategically, TD will now own 40 percent of the largest player in the U.S. discount brokerage business, rather than 100 percent of a mid-sized player in an industry where scale is a key advantage," said Andre-Philippe Hardy, analyst at Merrill Lynch.

"Furthermore, TD Ameritrade is much better positioned to take advantage of further consolidation in the industry than TD was on its own."

Hardy raised his price target for TD shares to C$59 from C$56, and others were quick to follow suit.

National Bank Financial increased its target to C$61 from C$58, while RBC Capital Markets boosted its rating to C$62 from C$59, implying the shares will rise another 12 percent over the next year from the record high of C$55.38 they hit on Thursday on the Toronto Stock Exchange.

The deal follows weeks of speculation about consolidation in the sector and raises questions over the next move of rival E*Trade Financial Corp. , which had pursued its own bid for Ameritrade.

But analysts said E*Trade faces an uphill battle, particularly with a large chunk of Ameritrade controlled by the company's founding Ricketts family.

"While nothing precludes E*Trade from pursuing Ameritrade with another offer, we believe the economics of trumping the current offer are far less attractive," said UBS Investment Research analyst Jason Bilodeau, who boosted his price target on TD to C$64 from C$61.

The agreement includes a break fee of $97 million.

While the deal has been a positive for TD's shares, it has driven Ameritrade's stock through the roof.

The company's shares, which rocketed up more than 20 percent on Wednesday, were up 88 cents, or 4.9 percent at $18.75 on Nasdaq on Thursday. ($1=$1.23 Canadian)

02 June 2005

Analysts Puzzle Over RBC Numbers; Explanations Insufficient

Financial Post, Barbara Shecter, 2 June 2005

In an industry whose analysts frequently complain about murky financial disclosure, Royal Bank of Canada is making a name for itself as the bank least likely to be clear in explaining its performance.

The latest issue riling those who track the banking industry is Royal's level of disclosure about how the bank increased its market share and interest margins for personal loans and deposits.

Analysts are puzzled about how Royal was able to do this in an extremely competitive marketplace in which Canada's other big banks were unable to do the same.

All the banks have recently been offering discounts to posted mortgage rates and higher interest rates on short-term deposits to defend their market shares.

But the effect is to compress the difference between the two rates -- which is in other words the margin, or return, for the bank. For example, Bank of Montreal's retail net interest margin fell to 2.64% in its second fiscal quarter, from 2.68% in the first fiscal quarter. All the other banks showed declines as well.

Except for Royal, which showed an improvement to 3.20% from 3.16%, according to research from First Associates Investments Inc. It's all the more puzzling because Royal will not clearly explain why its numbers improved.

Explanations offered during the quarterly conference call "were many and they seemed mostly contradictory," said Quentin Broad, an analyst at CIBC World Markets, in a research note.

Royal's management said the mix of the loan and deposit portfolio had shifted to include more higher-margin unsecured loans. But Mr. Broad suggested Royal might have improved its numbers by taking on additional risk. It may have shifted the loan mix in favour of unsecured loans which are harder to collect on if they turn sour. This might lead to higher retail credit losses. "While we have not jumped to any conclusions, we will watch the migration of retail credit losses very closely."

Mr. Broad warned that investors will not reward Royal with higher valuations and that the stock may not rise further because of "the challenges of measuring the bank's performance given its current disclosure levels."

David Moorcroft, a spokesman for Royal Bank, said the needs of analysts must be weighed against the danger of disclosing the secrets of the bank's success to competitors.

But details about the trend in margins is just the latest disclosure issue at Royal that is troubling analysts.

Last quarter, Royal began reporting its results in three geographic divisions rather than the five used previously. Analysts complained the new disclosure made comparisons with previous results difficult, particularly for the U.S. operations.

Such comparisons are crucial because Royal has spent US$5.5-billion to buy companies in the U.S. in what now appears to be a stalled effort to build a full-fledged financial services company there. Analysts want to track the results to gauge the likelihood of Royal bulking up with additional assets or selling the operations.

The latest twist in this issue happened in last week's second-quarter results, where goodwill from U.S. acquisitions was shifted to the Canadian businesses, as an accounting consequence of the new reporting structure.

Just over 70% of the $3.1-billion of goodwill associated with the purchases of U.S. retail bank Centura and securities firm Dain Rauscher, is now attributed to the Canadian operations.

"We believe the return ratios [now] presented for the U.S. operations are not representative of reality since the common equity allocated to it is not representative of the money invested in these operations," Darko Mihelic, an analyst at First Associates, wrote in a note to investors. "Management appeared to agree with our view on this and assured us that they do not evaluate the returns of their divisions based on these accounting allocations (even though their [second quarter] report says that they do use these measures)."

Royal Bank executives have also cautioned against using regulatory filings. That may sound confusing, but what it means is the bank is "effectively suggesting there is no meaningful way to evaluate [the] U.S. results with published data," he said.

On a positive note for analysts, Royal recently joined Canada's other big banks in using Canadian accounting rules Generally Accepted Accounting Principles as the primary financial reporting standard. Analysts had criticized the use of U.S. GAAP because only a small portion of Royal's investors reside in the U.S.