BUSINESS WATCH

Royal Trust challenges the banks

Peter C. Newman July 27 1987
BUSINESS WATCH

Royal Trust challenges the banks

Peter C. Newman July 27 1987

Royal Trust challenges the banks

BUSINESS WATCH

Peter C. Newman

This week Royal Trust begins issuing some intriguing new financial instruments, which threaten to revolutionize the multibillion-dollar but relatively staid guaranteed investment certificate (GIC) market, traditionally reserved for investors satisfied to get low earnings on their funds in return for minimum risks. One of those instruments, called a Guaranteed Market Index Investment (GMll), will allow purchasers to choose whether to peg the interest they receive to the Toronto Stock Exchange’s index of 35 Canadian blue-chip stocks, or a similar New York Stock Exchange indicator, or the price of gold, based on the closing daily spot quote on the New York Commodities Exchange. The minimum risk comes in because such transactions (at least up to $60,000) will be insured by Ottawa’s Canada Deposit Insurance Corp.

One example of how this new plan would work: If last Nov. 30 an investor had chosen to tie his GMll to a percentage of any increase in the TSE’s 35— which went up by 24 per cent by the end of May—his investment would have grown by 9.6 per cent over the six months, or 19.25 per cent on an annualized basis. That is considerably more than the 7.25 per cent currently offered by most trust companies on conventional GlCs. If the stock market had crashed, there would be no interest payments, but the principal would be safe.

Another new investment vehicle will be the Diversified GIC, whereby 75 per cent of the investor’s funds is put in a high-interest GIC and the remainder into a mortgage mutual fund. “It is really an answer to mutual funds,” says Michael Cornelissen, Royal Trust’s chief executive officer, “but there is no front-end load and no risk.” As for the GMll, it is actually a new twist at the consumer level to the Stock Price Adjusted Rate Certificates (SPARCs) introduced by Royal Trust last year. Those fancy deposit certificates allowed institutional investors to preserve their capital while participating in the stock markets’ upward trends, which they are only allowed to do under very strict limits at the moment. Interest paid on deposits was pegged to indexes such as the U.S. Standard & Poor’s composite 500-stock index. As under the new GMll plan, investors had their principal protected in case the market dropped. (Royal

Trust protects itself against market fluctuations in all these floats by hedging its own exposure with futures contracts.)

The introduction of such financial instruments is part of Royal’s drive to become not only Canada’s largest trust company (total current assets $79.1 billion) but also its most profitable (1986 net income of $154 million was up 36 per cent from the year before). Royal Trust has been growing so fast

that its nonfiduciary functions threaten to turn it into a giant money supermarket, instead of the stuffy trust company it was only four years ago.

What changed the once-sleepy company was its acquisition by Peter and Edward Bronfman in 1983, as part of their Trilon juggernaut. Although Royal’s board of directors ranges from former NHL superstar Jean Béliveau to a former Public Service Commission chairman, Jean Fournier, the Bronfmans are firmly in control. But I

it was Cornelissen, a former South African accountant chosen by the brothers, who turned around the trust company that had so long languished under the somnambulant management of former chairman and chief executive officer Ken White.

“Our corporate objective is to make our clients wealthy,” boasts Cornelissen. “To achieve that, we focus on people and technology. Our ratio of staff to computer terminals is two to one, which is very high, and we spend about $75 million a year on research. We have also moved from the old style of human-resource management, which rewarded people on the basis of their place within the hierarchy, to a system based on their achievement of corporate objectives.”

Probably the trust company’s most valuable recruit is that veteran Establishment icon Hartland MacDougall, who left the internal turmoil of the Bank of Montreal’s management floor to become Royal’s chairman in 1984. He puts in 12-hour days, expanding his firm’s credibility with major customers, and was recently elected head of the Trust Companies Association of Canada.

Cornelissen says that chartered banks, not other trust companies, are his main competitors now. “And they’re competitors,” he claims, “not because they’re good but because they’re big, with a huge branch system, literally 10 times ours. Yet that very size often defeats them because of the time it takes for a bright idea to be translated into action. It often takes so long to get by their many levels of approval that opportunities pass them by. Their style of management worked for the army and the church, but it’s out of date in this technology-driven age.”

As part of his streamlining of what Cornelissen describes as “a wonderful company that had been allowed to go to seed,” he eliminated five to seven levels of management between himself and his customers. Not even trying to hide his delight, Cornelissen reports that a senior vice-president with one of Canada’s major banks recently complained to him that there were a dozen reporting levels between himself and the chairman.

The new financial products are part of Royal Trust’s aggressive drive to become as large and powerful as the chartered banks that its chief executive officer loves to ridicule.