Royal shakeup splits up RBC Dominion

The full-service brokerage unit gets caught in the division.

Essentially, the retail division splits from DS. The DS name will remain, but only for the corporate and investment banking division, which includes RBC DS Global Markets, its foreign exchange and fixed-income trading unit and all other institutional services, such as the equity sales and trading, corporate finance and mergers and acquisitions businesses.

Tony Fell stays on as chairman and chief executive of DS, with Charles Winograd moving in as president and chief operating officer. Winograd came to DS when Winnipeg-based Richardson Greenshields of Canada Ltd., where he was chairman and chief executive, was acquired in November 1996.

DS’s retail business, known as the private client division, will be rolled into a new comprehensive retail investment division, tentatively being referred to as the wealth management division.

The DS name will disappear from the retail brokerage operation, although it has yet to be decided what will take its place. The private client division will join all Royal’s other retail investment subsidiaries in the new division – including Royal Trustco. Ltd., Royal Mutual Funds Ltd., Royal Bank Investment Management Inc., RT Investment Management Holdings Inc, RT Investment Counsel and discount brokerage Action Direct.

Reay Mackay will leave DS to head the new wealth management group and will become a vice chairman of the bank. Mackay previously held the titles president and chief operating officer at the integrated DS.

Peter Russel, head of the private client division, says that all its structure and reporting lines stay the same, except they fall under the wealth management group’s umbrella.

DS brokers are forbidden from speaking publicly about their firm, but privately they admit mixed feelings about their changing ownership structure.

But Russel says any changes will begin several months down the road, and then they’ll be gradual and “evolutionary” as the strategy crystallizes. “This decision was only made in the last three weeks and it’s too early to say [what will happen]. I think Reay will be spending the next few days talking to people within the organization to figure out how to put together the group,” Russel says.

While the wealth management group might not have its specific structural plans laid out, it does have a vision – to build a client-driven retail investment powerhouse.

“The purpose of this move is to focus on client service, to ensure that the client is served in a seamless fashion,” Russel says. “[DS retail] has one of the best relationships with the bank, but the communication link was not great.

“Our clients told us they were well-served by private client, but they were poorly served [when it came to] getting to the right loans officer or trust person.”

By putting together a group of companies that are among the cream of their respective fields – DS private client, Royal Trust and Royal Mutual Funds – the bank hopes to eliminate the problem. But this will be easier said than done.

“The key in these things is execution,” says Simon Lewis, president of Royal Mutual Funds.

Russel agrees. “We are in the unique position of having all the leading companies. We’ve got all the pieces, the trick is fitting them together.”

Lewis says Royal’s mutual fund business should not change very much.

“We are probably least affected by this, the structural changes are geared to the distribution network. We’re not planning any new funds, or new services [as a result of the reorganization], but we’ll be there to help the process along.”

Currently about 10% of Royal’s fund sales come from Action Direct and DS retail combined, says Lewis.

While the funds’ side is not expecting any meaningful changes to its business, the broker network is not exactly sure what to expect. Brokers at DS appeared excited about the possible opportunities the move will bring, but their two big fears were further cultural change and bottom-line impact.

Uneasy marriage

The marriage between banks and brokers has always been an uneasy one, and there is some trepidation among DS brokers about what the latest change will bring.

Banks are typically slow-moving organizations laden with bureaucracy, while brokerages are more independent and dynamic.

Bringing the brokers to heel under bank ownership has been a tough transition for some firms. Now DS brokers will be losing their connection to their heritage, in the form of their more glamourous cousins in corporate finance and investment banking. It’s a move that may make them just another set of cogs in the banking bureaucracy, particularly if former broker Mackay is one day replaced by a banker.

Russel insists the retail division will retain its brokerage heritage and that it will be run much the same way as before. While it won’t be an old-style full-service brokerage, it won’t just be another bank division.

“We are creating something entirely new … we are not becoming bankers, we are creating a new [kind of] organization as we go into a new millennium.”

Russel says the new group’s philosophy will be first and foremost, client-driven.

“If it’s good for the client, it’ll be good for us. This whole initiative is coming from what clients have told us they want.” The group will also be a very flat organization, and it will maintain an entrepreneurial philosophy, says Russel.

The brokers appear skeptical and are concerned about compensation. As part of the move, Royal Bank is taking full-ownership of DS, buying out the 20% control held by the firm’s employees in the form of preferred shares – and not at the multiples of book value that other recent buyouts have paid. These shares also gave brokers, and other DS employees, a significant profit-sharing capacity.

Slimmer profits

Brokers fear that without their high-earning brethren from the institutional side to beef up revenues their share of profits will become slimmer.

For the three months ended July 31, Royal’s wealth management group earned $68 million on $560 million in revenue.

By contrast, the corporate and investment bankers earned $34 million on $493 million in revenue over the same period.

That equals profit of about $8,292 for each wealth management group employee vs $10,625 for each investment banking employee over the same period, even though investment banking was under pressure from declining markets.