From the July 2010 issue of Investment Advisor • Subscribe!

Your Next Custodian?

Mike Kavanagh and his team at RBC Advisor Services enter the RIA custody space with ambitious plans to attract big advisory firms

When advisors and the companies that partner with advisors think about RBC at all, they might consider it as a largish regional brokerage firm born from a big bank that acquired Dain Rauscher 10 years ago, which was itself a respected but still smallish firm whose own genesis came from consolidating a number of smaller, mainly Midwestern brokerages. Or they might consider that parent company big bank as a sleepy, slightly boring Canadian financial services firm, Royal Bank of Canada. I mean, this is America--we don't do royalty, right!

But starting now advisors will begin to think of RBC Advisor Services as a major player in the independent advice universe, and chances are good that more than a few will be attracted to this new player in the RIA custody space, especially advisors who are most coveted by all the custodians: those who serve high-net-worth clients with complex financial needs.

Moreover, RBC Advisor Services is not starting from scratch. On June 15, the company closed on its acquisition from JP Morgan of the old Bear Stearns RIA custody business. In a field where competitiveness is a function of people as well as technology, in which expertise in customer service counts as much as breadth of product offerings, RBC has been blessed with keeping together the key team that has continued to run the small but significant Bear custody business throughout that firm's nosedive in 2008, and which now will spearhead RBC's business development plans with high-end RIAs.

Mike Kavanagh, chief administrative officer and head, Independent Business Channels at RBC, says the decision to take on Schwab Advisor Services, Fidelity Institutional Wealth Services, Pershing Advisor Solutions, and TD Ameritrade Institutional was a "natural" one, citing RBC's "consultant-focused culture."

Starting with its "global reach but with a small-firm feel," and highlighting its Midwestern roots, Kavanagh said the move was hastened by RBC's realization that with the turmoil among the wirehouses occasioned by the 2008-09 markets and economic crisis, "the people breaking away" or considering a move from the wirehouses "were the same people we were trying to recruit" to RBC Wealth's brokerage force.

In announcing the closing on JP Morgan's Advisor Services business, which will continue to be run by Leonard Palmer in New York as Director of Client Services, the move was positioned as part of RBC Wealth Management's "ongoing expansion in the U.S.," noting that the firm has also recruited more than 300 "financial consultants" (i.e., employee brokers) to RBC Wealth during the current fiscal year, which RBC said was "by far the most consultants the firm has ever recruited in a single year."

For Kavanagh, the acquisition and recruiting success is part of the same strategy. "We're not competing for the $20-million-in-AUM advisor; we're focusing on the same elite 'advisor,' whether in the employee space, the correspondent broker/dealer space, or the RIA space." The tag line for Advisor Services? Custody and clearing for high performing RIAs.

Speaking of his competition, Kavanagh is respectful but sanguine. "The other custodians are built off online brokerages or mutual fund platforms, but our DNA is different," he says. No one, he posits, is already "doing as good a job as we are" in "catering to high-net-worth clients." RBC Advisor Services will "focus on larger advisory firms with high-net-worth clients," providing "complex solutions for clients with complex needs."

He cites the RIA clients who have stayed loyal to the Bear Stearns/JP Morgan custody team as both core to the new initiative's growth strategy, and emblematic of how RIAs will be serviced in the new division. "We're a natural partner for advisors; we have a strong service culture" already, says Kavanagh. "At most of the other custodians, you can't get to a person" to help you with your needs, and they also "can't provide an expert" on a complex issue "who won't cost you a lot of money," he argues. By contrast, he says "these JP Morgan people with an average of 11 years experience" in serving big advisory firms know how to provide expert customer service and access expert advice. Combined with RBC's long-standing expertise in trading, research, and capital markets, that advisor focus may very well make the new RIA venture a major player among elite advisors.

Value Prop. No. 1: The Parent Company

Before getting into the details of RBC Advisor Services' new initiative for RIAs, which was formally unveiled with the June 15 acquisition of the former Bear Stearns RIA custody unit called IAS from J.P. Morgan Securities, let's put RBC Advisor Services into context.

The parent company of RBC U.S. Wealth Management, headed by John Taft (the incoming chair of SIFMA), is Royal Bank of Canada, which bought Dain Rauscher in 2000. Royal Bank of Canada is the largest of that nation's 'Big Six' banks, as measured by capitalization and assets, with some 77,000 employees doing business in 55 countries, and with nearly 1,200 branches throughout Canada. The bank was founded in 1869. (See the Canadian Connection sidebar.)

Dain Rauscher traced its roots back to Oscar Kalman, who founded the brokerage firm Kalman & Co. in St. Paul, Minnesota, in 1909 and, through a series of mergers with other small brokerage firms over the next 89 years formed Dain Rauscher, which at the time of the RBC acquisition was valued at $1.45 billion, and had 2,600 brokers and 215 branches.

Shileen Groth, director of strategy and marketing for RBC Correspondent and Advisor Services, recalls that "we've been in the advice-giving business for 100 years," while Craig Gordon, director of Correspondent and Advisor Services who did a stint with Fidelity Institutional Wealth Management, touts the same culture that long characterized Dain Rauscher: "We've done it by staying focused on servicing the advice-giving individuals."

Kavanagh notes that now "we've got 220 branches in 46 states," and that "we've been serving the private client and HNW client, and clearing for 30 years. We're moving into this area naturally."

About that global reach: in addition to its brokerage operations, "We're a huge capital markets player with 1,600 people on the trading floor (in Minneapolis and New York)," says Kavanagh. The company also has a respected research arm in both equities and fixed income from RBC Capital Markets which is available to its broker/dealer and RIA clients.

Then there is RBC Correspondent Services, the company's correspondent broker/dealer clearing operation, which has been operating for 30 years and counted 170 B/D clearing customers as of year-end 2009, according to Investment Advisor's January 2010 clearing firm survey.

The company also has RBC Trust Company--a Delaware company founded in 1914 by members of the DuPont family specifically for their investment needs.

Value Prop. No. 2: The Bear/JP Morgan Connection

RBC Wealth Management got into the RIA custody business in a smallish way beginning in 2009, says Gordon, who in addition to his day job at RBC has been a FINRA arbitrator for 15 years ("It's more fun to learn from other people's mistakes," he says with a smile of his arbitration experience, saying he's "learned how to work with clients, and how to handle complaints.")

"We got into the [clearing] business 30 years ago," Gordon says, "but we've always serviced advice-givers, supporting them with the retail client."

But with the acquisition of the former Bear Stearns RIA custody business, RBC has entered the big leagues of RIA custody. RBC carefully wooed the customer service team from Bear run by Palmer, which has been situated in Brooklyn but will be moving to RBC's downtown New York location at 3 World Financial Center.

Dan Cronin, a senior VP of business Development at RBC Advisor Services, said the team realized that "we needed something like what Bear, Stearns had--higher minimums, for instance--so we started talking to JP Morgan." Groth remembers that Palmer's team told her "We're an elite service group serving elite advisors," which led to RBC focusing on "keeping that continuity going." Groth says the focus extended to the clients of that service team: "We had extensive one-on-one conversations" with those RIAs, resulting in a "north of 90% retention rate." Part of the appeal to those RIAs was that they would continue to work with the same service people, Groth says, while Cronin adds that those RIAs "wanted to know that we're committed to this business, that we're not going to take on all comers," and that the RIAs could continue to "get service without going through a maze--they'll know who their service manager is."

Moreover, having met with the top executives at RBC, and having seen the firm's strength, Groth says those advisors realized it would be a "seamless process" for the JP Morgan end clients, and with "a negative consent approach, there didn't have to be a whole repapering."

In speaking of RBC's strategic plans, the management team running the operation speaks glowingly of the former Bear team with 20 years experience in the custody service business run by Palmer.

But the RBC team itself is an interesting mix of executives with RBC longevity--Kavanagh has been with the firm for 25 years ("We don't have a lot of turnover," he deadpans.) and Groth for 15--peppered with newer hires with expertise in differing aspects of the advisor space, notably Gordon, with his Fidelity pedigree and former life as the founder and operator of his own small broker/dealer, which helps him serve a matchmaking role with reps considering independence and RIA prospects, and Cronin, who previously worked at both Fidelity and Schwab's custody units.

Value Prop. No. 3: Selectivity and Solutions

Kavanagh says that RBC's "sweet spot" among RIAs will be those with a complex, deep relationship with high-net-worth clients "who need insurance, non-purpose lending, estate planning." While any advisor can "cobble together" such complex plans, he argues that RBC is "used to providing all those things" through its existing infrastructure.

As for investment products, Kavanagh says "we have everything under the sun," as part of what he calls a true "completely open architecture" flexible platform which he credits in large measure to RBC's success among its broker force.

Cronin ticks off a few specific offerings that should be appealing to RBC RIAs' HNW clients: "We're the only custodian who can give them a premium line of credit--using LIBOR, outside of margin; other custodians are doing it, but not featuring it. We do it through RBC International, for both lines of credit and letters of credit," and that RBC will work directly with the HNW client to get those LCs. He mentions as well that "We have trust offerings through RBC Trust."

On practice management, Groth says RBC is already providing assistance and plans on doing more. Gordon mentions a program RBC has been running for three years called "Eight Best Practices of Highly Successful Advisors" on both the B/D and RIA sides. There's also a formalized, optional coaching program that RBC offers, Groth points out, a one-year course focusing on four different areas of an advisor's business, using both internal and external coaches. RBC follows up with the program's participants, and Groth says that "advisors that go through the program grow faster."

"Our business will come from breakaways," Kavanagh says, and from existing RIAs "who like what we offer." Then, "we'll grow our share of business with the folks we go after--we will compete for business that fits our niche, and we'll take business away from others, because we'll serve them better." Admitting that the RIA initiative will be "something of a retention tool" for RBC in the future, Kavanagh stresses however that "our main intent is to attract new advisors."

He also seems to hold out the possibility of both referrals and retention of existing RBC brokers in stressing that "we have 220 branches in 46 states--we're educating our branch managers on this option." Employing RBC ASAP, an onboarding program for new advisors doing business with RBC, Kavanagh believes there "will continue to be opportunities in the breakaway broker biz, but they will lag."

While Kavanagh says RBC would prefer to be the custodian of choice for RIAs with HNW clients, he says "We'll get our toe in the door, asking 'Why not use us for your HNW clients?', while inviting RIAs to "pick and choose from what we offer."

The Measure of Success

How will RBC know it's achieved its goals with the new initiative? Gordon says the intent is to work "with very few advisors. The other custodians are well suited to serve advisors with thousands of [mass affluent] clients--we want to be best of breed." Kavanagh says bluntly that "We will be the gold standard for custodians."

Cronin says that "no one here wants (to rush into this); we will take our time, build it right, and get ideal clients." He suggests that "we'll have 200 to 300 RIAs in five years, rather than a thousand," stressing that with RBC's focus on high-end RIAs and elite breakaway brokers--"It's not a fit for everyone; we have to say 'No' a lot."

Growth, Gordon suggests, will come from "existing RIAs with HNW clients, and over the next 10 years you'll see a process of practitioners trying to find the right spot--and there's a lot of them."

Arguing that "the trust and confidence that was shattered in 2008 validated the independent model; times like these changes people's thinking," Gordon concludes by taking the long view: "We've got a whole decade ahead of us to see how things work out."


Group Editor-in-Chief Jamie Green can be reached at jgreen@sbmedia.com.

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