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Royal Bank of Canada is hustling to become an RIA custody force

RBC Advisor Services weaves together RIA businesses of old Dain Rauscher and old Bear Stearns

Monday, May 24, 2010 – 5:50 AM by Brooke Southall
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Craig Gordon: We have 2,400 in-house advisors. It would be very different if I told you it was 24,000. The commitment in that channel would be too big to disrupt..

The Royal Bank of Canada is starting to mean more to some RIAs than just a north-of-the-border goody two-shoes bank that dodged the mortgage crisis.

The RBC Advisor Services pitch for why an RIA should open their minds to its custody is this: It’s paired with an investment bank that’s been geared to supporting advice-giving financial advisors.

It’s been supporting full-service brokers – and a few RIAs — for decades. Now, it’s offering those services to RIAs with a dedicated unit that was bolstered on Oct. 29, when RBC announced that it had acquired the RIA unit of JPMorgan. See: RBC’s appearance on the custody scene could be a 'game changer’

The pitch doesn’t sound so different at first from other custodians. But consider that the lineage of Charles Schwab & Co., Fidelity Investments and TD Ameritrade is direct service of clients. Pershing is a clearing company that, foremost, serves broker-dealers.

Royal Bank of Canada is an 80,000-employee behemoth operating in 55 countries with 18 million clients. It owns RBC Wealth Management, which has 200 locations in 43 states and encompasses the old Dain Rauscher, a Minneapolis-based full-service broker-dealer and investment bank.

Cover of night

Other investment banks like Bear Stearns and Merrill Lynch and other Wall Street-feel companies like State Street have built RIA custody units. But they have done so largely under the cover of night. Common sense told them that there was a rich opportunity serving registered investment advisors and so they did. But street sense told them to do so quietly and that reticence has stunted their growth and evolution.

Merrill Lynch’s Broadcort stopped taking RIA assets from new clients last year [See: In major reversal, Merrill turns away RIA assets ]; State Street keeps a low profile despite having about $200 billion of RIA assets and the Bear Stearns RIA unit is (almost) now in the hands of RBC after a brief ownership by another RIA-reluctant firm — JPMorgan. See: RBC is checking every box to ensure it acquires the JPMorgan RIA unit intact. All the wirehouses do some RIA custody on the side.

RBC plans to give its RIA custody unit all the sunlight and water it needs to grow.

“It’s different for our organization because the size of our client service is very different from Merrill Lynch” and other investment banks, says Craig Gordon, director of correspondent and advisor services for RBC Advisor Services in Minneapolis. “We have 2,400 in-house advisors. It would be very different if I told you it was 24,000. The commitment in that channel would be too big to disrupt. [The concern over disruption] is very real [for Merrill Lynch]. We view it as an opportunity that they’ve downplayed or participated in sheepishly.”

Indeed, it’s hard for a Merrill Lynch to explain to its brokers why it is offering 100% payout to RIAs for getting the same basic platform as the broker only getting a 45-60% payout, analysts say.

Relatively small

RBC Advisor Services is still relatively small and unthreatening after having formed a separate unit for RIA custody in 2007. It supports 84 RIA firms with a combined $11.5 billion of assets under management counting the advisors who will become RBC clients when it closes its acquisition of the JPMorgan [and former Bear Stearns] RIA custody unit next month.

Here are the basic facts about RBC Advisor Services:

Name of custodian: RBC Advisor Services

Address: 60 South 6th Street, Minneapolis MN 55402

Phone number: 866-589-1707

Founded: 2007

Parent company: RBC Capital Markets Corporation

Total assets in custody: $11.5 Billion

Number of RIAs using platform: 84

Head of RIA custody business and executive’s starting year with the company: Michael Kavanagh, 1985

Head of RIA sales and starting year: Craig Gordon, 2000

Date of last major update on tech platform: 2009

Minimum assets for advisors: $100 million

Fees for RIAs that fall under the minimum: n/a

Less name recognition

Analysts believe that RBC at least appears to be putting the right foot forward.

“I saw a presentation from one of their execs last December and was impressed,” says Sean Cuniff, research director of the brokerage and wealth management for TowerGroup of Needham, Mass. “ They have a clear understanding of the space and are focused on building out the RIA platform. One challenge is that they have less name recognition than the big three. They are not always mentioned in press coverage, etc.”

Joe Birkofer, partner with Legacy Asset Management Inc., which manages $190 million of assets from Houston, Texas, says that RBC’s small size is also its advantage – particularly because it is part of world-class, famously-solvent Canadian bank and has its wealth management arm based in the friendly Middle West.

“They were Midwest as opposed to New York,” he says. “We liked the central time zone and the fact that RBC is not a household name works in its favor. There are plenty of household names in the RIA business and they’re competitors as much as colleagues. We made a good deal [of the fact] that it was RBC – as in Canada and Canada has been lauded. It hasn’t been in a negative headline.”

He adds: “In a small town like Houston, Schwab is practically next to every Starbucks. I don’t need that.” Birkofer has used RBC since 1998 when it was still Dain Rauscher.

John Duffy also swears by RBC as a custodian though for different reasons. It makes it easier to meet some of the demands of advisors he works with who serve ultra high net worth clients.

RIAs discover RBC by accident, get hooked

John Duffy discovered RBC as a custodian almost by accident about 18 months ago. He had a client with $40 million of assets who had done business with RBC and wanted his assets there. Duffy, CEO of Municipal Portfolio Managers, which manages about $750 million of assets from Atlanta, also had a comfort level because he knew RBC’s Dan Cronin from his days working in the custody units of Schwab and Fidelity.

Now Duffy’s an RBC convert, though he still holds significant client assets with Fidelity. “Of the custodians we’ve used, RBC is by far the best,” he says. “[Fidelity says] here’s the box, don’t deviate from the box. Nothing is cookie-cutter at RBC and we’re in a very customized business.”

If RBC can continue to deliver this service, it can gain an edge with some clients.

“Advisors who serve the ultra high net worth are the most desirable clients. If RBC has figured out how to serve the ultra high net worth clients better than anyone else they will be a force to be reckoned with,” Cunniff says.

The capital markets prowess that RBC bestows on ultra high net worth investors can be traced to its acquisition of Minneapolis-based Dain Rauscher in 2001, which currently has 2,400 full-service brokers. Its investment banking arm has been supporting advisors since 1979 when it was founded as Rauscher Pierce.

Duffy gives a good example of how RBC distinguishes itself in serving his ultra high net worth clients.

Municipal is a former unit of Lehman Brothers that chose [and was encouraged by Lehman] to turn independent after the plane attack of September 11, 2001 left a foot-thick layer of dust and debris in its office across the street from the Trade Center towers. Lehman didn’t want to invest in the necessary support staff after the disaster and Duffy found it easier to staff up as an independent. Now, as an Atlanta-based independent RIA, his firm continues to manage the municipal bond portfolios of the ultra high net worth clients of the brokers at Bank of America, Barclays Capital and UBS.

Custody of raw leases

One recent example of RBC winning Duffy’s trust was when it didn’t balk at handling custody of raw leases that are like municipal bonds without an underwriter. For example, a fire department in Kansas needs to buy fire trucks and wants to get cash direct from investors without paying fees to investment bankers. “We bid against [investment banks] and get a full percentage point better than the municipal bond” in these deals, he says.

You have to be in the business of serving the ultra high net worth investor to appreciate the difference that a big bank and investment bank like RBC can make, Gordon says. “It’s just different – with lending, trust services, fixed income, foreign currency trading and capital markets,” he says.

RBC is one of the biggest municipal bond underwriters in the United States.

RBC’s municipal bond inventory gives it an important edge over Schwab and Fidelity, Duffy says. “Schwab is not present at all,” he says. “Fidelity is making an effort.”

Criticism is 'perplexing’

Mike Durbin, president of Fidelity institutional Wealth Services, called Duffy’s comments about Fidelity’s bond inventory “perplexing.” He says his Boston-based custodian offers a bond inventory to RIAs that is second to none.

With service at RBC looking strong, Duffy says he has been consulting a fellow RIA with more than $1 billion of assets under management that was looking to move assets from Schwab to Merrill Lynch’s Broadcort to better serve ultra high net worth clients but stopped the process when markets tanked in 2008. He’s strongly encouraging that the RIA give RBC a closer look.

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