The Transition from Conviction to Chameleon.

The Burgundy Asset Management Ltd. transaction was no surprise. It was long rumoured ‘on the market’ for several years.

While it is natural for owners to prepare their liquidity exits; this strategy needs to be balanced with what is truly in the client’s best interests.

The very original foundational premiss of many firms (being ‘independent’, ‘non – aligned’ and ‘proprietary free’) lies in obvious stark contradiction to the premiss of the new bank narrative. One asks the question: Does this serve the interests of portfolio managers or their clients?

Burgundy Asset Management epitomized two holy characteristics: a) the stubborn necessity of strict business and investment independence and b) the steadfast commitment to its own pure investment conviction. Nobody illustrated this better than Burgundy. Its brand was built on this powerful, sacrosanct mantra. Indeed, it was THE reason for its attraction for both client- investors and portfolio managers alike!

While they were infamous for what they stood for, they were equally noted for what they stood against. They were notorious for their toxic aversion to product manufacturing, funds, commission-based selling, product cross selling – everything the bank epitomizes. So what now?

While some of Burgundy’s Portfolio Managers will now be receiving their retention payments – both portfolio managers and their clients should be asking themselves: What is my real appetite to join a bank, when I have been a loyal supporter of my independent wealth manager for 35 years? After all, that is why I (client investor) was attracted to and remained with the firm.

We understand the difference between core manager ‘conviction’ and momentum investing. So what does the ‘Day After’ really look like for acquired firms just like Burgundy:

1. The preservation of the employee’s current compensation for a limited, fixed period. Normally only 12-24 months at best. This will revert to a Bank based formula (the bank needs to recoup money it paid out for the firm!)
2. The pressure to introduce and sell bank investments
3. The pressure to sell/cross sell bank loans, CC’s, credit lines, mortgages, etc, etc.
4. The inevitable loss of firm’s autonomy and investment independence.
5. The steady increase in management fees.
6. The preservation of the brand is not assured.
   These are the typical common results for all employees, most notably – Portfolio Managers and their client-investors.

In fact, in almost every case of a bank acquisition, (except for brand preservation), the first five of the above six criterion were the inevitable results of the acquisition of wealth management firms in Canada. They literally go hand in hand.

They remain the most common reasons why Portfolio Managers exit the banks in favour of independents today.

The sudden changing narrative occurring amidst a shareholders liquidity exit may raise many questions for client-investors, as to exactly where their own best interests lie.

The asset retention function has significant consequences for the economic value of the liquidity exit-for both owner/shareholders and portfolio managers. While the ‘holdback’ is perfectly standard in M&A, the very public mention of this clause is a subtle warning: meet the hurdle or else you don’t get the full pop. (Remaining 20%)

It becomes critical that clients are now being asked to ‘love the bank’ for shareholders to realize their full value. What may be good for bank shareholders is not necessarily the same for Burgundy’s client-investors.

Indeed, private clients-investors can hold bank stock with any private wealth manager without being clients of the bank! One has nothing to do with the other.

Let’s dispel the notion the firm lacked choice of buyers. This firm was anything but a distressed company needing a buyout! As far as brand prestige and reputation goes, they sat at the very top.

Banks are hardly the only option for sellers. The M&A business has become a North American playground. Banks are fiercely competing against a swarm of other major institutional buyers.

In today’s competitively desperate market for wealth managers, there are a plethora of buyers. Ranging from asset managers, asset conglomerators, insurance companies, VC and Private Equity firms: not only are there a multitude of options but many offer far more flexibility and autonomy than traditional banks, epitomizing stringent protocol across the board.

The task of convincing the client to embark on their ‘new journey’ may indeed pose the biggest challenge for the Portfolio Manager, now preparing to provide a whole new spin, to secure client – asset retention and preserve shareholder value.

That is precisely the risk he/she is now assuming before engaging with the bank.

This paradigm change not only has repercussions for the client: but the very contradictory narrative puts the portfolio manager in an awkward bind: His / Her ability to tap dance around this glaring contradiction, may have severe implications for the portfolio manager’s ability to transition their own clients.

After all, their name is aligned with the firm they now represent.

This could be a transition the Portfolio Manager might not be prepared for.

Mark Toren
President & CEO
Toren & Associates