Dundee deal helps define wealth market

“There are two players in this world of ours: distributors, that’s what banks are; and actual investment managers, the companies that are built on the back of analytical expertise.”

Until Monday, Dundee was in the latter camp, with some of the industry’s best and brightest asset managers and headed by Ned Goodman — “Canada’s Hall of Fame investor” as Jackson puts it. “Dundee is now part of a distribution company.”

A big-company game
“The true private client business is fine, you do not need scale; you do not need a bank behind you,” he says. “It’s a business that will always be fine on its own. Dundee was in a lot of different businesses, and some of them are a better fit for a distribution company.”

While investment analysis was at the core of Dundee, it had become a very broad company. Its flagship Dynamic Funds brand, arguably one of the strongest asset managers in Canadian retail mutual funds, faced the same problems as the rest of the fund industry: fee-compression, which makes cost cutting and economies of scale vital.

“Even though Dynamic Funds is a good group of mutual funds, the reality is, being part of what is now the fifth largest mutual fund management company in the country does give them distinct cost advantages,” Jackson says. “Some of the businesses that Dundee was in are difficult to succeed in for an independent firm. The mutual fund management and distribution business, that’s a big-company game.”

While the mutual fund business will generate large quantities of cash, the real prize embedded in Dundee is the private client business. The banks have been asserting themselves in the wealth management space for several years now, building out their own operations and acquiring smaller firms.

“If anything, this consolidation trend is helping us, because it is clearly defining who the distributors are,” Jackson says. “What are left are the shops with no distribution motive, and that’s where the true independent wealthy clients go.”

The deal “gives Bank of Nova Scotia visible direction and momentum toward becoming more of a legitimate wealth manager,” Jackson says, an area in which Scotia has lagged some of its competitors. The problem, Jackson says, is that the distribution mindset is hard-wired into banking culture and this can come into conflict with the goals of the high net worth client.

“To really be fully aligned with the objectives of your clients in protecting their wealth, it’s much cleaner if you do not have a distribution motive. It is incumbent upon (Scotia’s) management to maintain that focus on capital protection and trust, and not on distribution and sales.”

For the deal to be a true success, Scotia will need to import Dundee’s investment culture into its own asset management division.

“If David Goodman stays with the bank, running the investment arm for a long period of time, that’s a very good thing for the bank,” Jackson says. “The core investment management arm — the guys who are actually making the decisions on those mutual funds — over a long period of time, do they come in to run the investment arm of Scotia, and stay there? That’s the part that we have to see.”

Another question that remains to be answered is whether Dundee’s prized high net worth clients will be happy becoming Scotia clients. There’s a big difference, Jackson says, between the way a bank operates and the way a private asset manager operates.

“I have a private banker, but there’s a new 23 year old private banker every 18 months. She has a directive: She has to bother me every six months and try to sell me product. That’s what banks do, they sell product and take a spread.”

(11/24/10)