The Burgundy boogie

This spring’s acquisition of Burgundy Asset Management Ltd. by BMO Wealth Management was no surprise. Rumours had swirled that it was on the market for several years. Still, it has important implications for our industry and the clients we serve. While it is natural for owners to prepare a liquidity exit, the interests of investors bear careful consideration.

Like other independent firms, Burgundy offered a value proposition that stands in stark contrast to the one offered by banks. It epitomized what it meant to be independent. It was stubbornly committed to its pure investment convictions. The team built its brand on a powerful, sacrosanct foundation that attracted both clients and portfolio managers.

They were just as well known for what they stood against — an aversion to product manufacturing, funds, commission-based selling and product cross-selling.

It’s difficult to imagine how all of that aligns with a bank-owned wealth management firm.

The $625 million deal is due to close at the end of the year. In the meantime, portfolio managers and their clients are likely considering their next steps. Will these loyal supporters of an independent wealth management company join a bank?

What comes next

Acquisitions like this one tend to follow an established process that can be roughly broken down into six phases:

1. Employee compensation is preserved for a limited, fixed period — normally 12–24 months at best. This will revert to a bank-based formula as it recoups the money it paid out for the firm.
2. Pressure to introduce and sell bank investments will begin.
3. Pressure to sell/cross-sell bank loans, credit cards, credit lines, mortgages, etc. will follow.
4. The loss of the firm’s autonomy and investment independence is inevitable.
5. Management fees will increase steadily.
6. The preservation of the brand can go either way.

This is not a criticism of BMO. What I’m describing is fundamental to the economics behind deals of this nature. The first five of these phases have occurred in almost every case of a bank acquisition. It’s why so many portfolio managers prefer to work for an independent firm, and why so many clients follow them.

When they do, it can have significant consequences for the economic value of the deal — for owners/shareholders and portfolio managers.

While it’s standard to hold back a percentage of the purchase price based on an asset retention target, take note when that’s made public. It’s a not-so-subtle warning: meet the hurdle or else you don’t get the full pop.

A prestigious firm

We can dispense with the notion that Burgundy lacked choices. This was no distressed company in need of a buyout. As far as brand reputation goes, it sat at the very top.

The market for premier wealth management firms like it extends well beyond banks — from asset managers, conglomerators, insurance companies, to venture capital and private equity firms. Not only are there a multitude of options, many offer far more flexibility and autonomy than banks can.

The challenge in the months ahead for Burgundy’s portfolio managers will be to assure their clients that the move offers more upside than downside. No small thing, given the contradictions inherent in any bank’s acquisition of an independent wealth management company.

Particularly one of Burgundy’s stature.