It’s safe to trust

Royal Bank of Canada is securing its European presence with trust acquisitions, but, as chief executive Michael Lagopoulos explains to Yuri Bender, the focus is still on winning the faith of international clients. While running Royal Trust’s operations in Jersey, Guernsey and the Isle of Man in the 1990s, the only chequebook Michael Lagopoulos had access to was the multi-currency book available to high net worth private banking clients. Today, as chief executive of Royal Bank of Canada’s (RBC) global private banking operation, he is brandishing the corporate chequebook in the European market. RBC has already spent money in Europe and the Canadians have a treasure chest earmarked for further acquisitions. “We have worked on 15 unsuccessful acquisitions from London, and three successful ones,” reveals Mr Lagopoulos. The successful buyouts were the Jersey and Guernsey- based trust businesses of accountants Ernst & Young (E&Y), and the European offshore corporate trust business previously belonging to Coutts, private bankers to the British royal family. “We continue to see a steady stream of potential deals in both the UK and in selected European markets. We don’t have a blank cheque, but we know we can bid aggressively on some large opportunities,” says Mr Lagopoulos, setting out his stall. For servicing assets, Europe is the most important territory in RBC’s empire, and its influence is growing. Currently, E75bn of clients’ assets are advised out of the Channel Islands, London and Geneva, serviced by more than 1000 staff. Globally, RBC runs E110bn for private clients. But unlike some competitors, RBC’s targets are based on growth of revenue, not assets. “When investment performance has been poor, our profitability has still been very strong,” says Mr Lagopoulos, who is still aiming for the “benchmark” 15 per cent in profits growth achieved annually between 1995 and 2000. Profit Squeeze Profits in the last two years – apparently down 10 per cent each time, although RBC does not publicly release its numbers – have been squeezed by narrowing currency spreads, lower fees due to falling markets and a low volume of transactions generated by ultra-cautious clients. “Other private banks have built up a high cost infrastructure. But during these two tough years, we have always been looking closely at profit margins and cost structure,” says Mr Lagopoulos. RBC’s aggressive push into London’s private banking market, seen as the core of the bank’s European business, has been backed by the poaching of a five-strong team of bankers from Merrill Lynch. “We have been doing business with the British people successfully, plus there are many people who live in the UK who originate from the Middle East. London also services significant numbers of British citizens living in Spain and on assignment throughout the Caribbean. Every time they cross a border, they become a client opportunity,” reveals Mr Lagopoulos, whose private bankers typically target well-paid lawyers, doctors and chartered accountants in need of international tax planning. The acquisition of E&Y’s Guernsey trust business in 1999 and its Jersey operation last year has left RBC well positioned to set up tax-friendly structures for internationally mobile clients. Revenues generated from RBC’s Swiss hub in Geneva are also expected to hold up. “Our Swiss operation has never been totally focused on Europe. In this, we are very different from our competitors,” says Mr Lagopoulos. Latin links Most customers of the Geneva office are Latin Americans with links to the bank from the time when it had bricks-and-mortar retail branches in the Dominican Republic, Cuba, Venezuela and Argentina. While he expects the Swiss office to prosper from Latin flows, Geneva’s reach is broadening. Last May RBC hired a quartet of bankers from JPMorgan Chase for their European expertise. “The European client is still interesting, but in a broader definition of Europe. Turkey, for instance, is not yet in the EU, but on the fringes.” Neither has Mr Lagopoulos turned his back on his ancestral home of Greece, an “interesting” jurisdiction, where he admits entrepreneurs have a flexible view of taxation. Understandably, he is coy about numbers of Greeks using the bank. “There is a lot of Greek money in London and a lot in Switzerland. There are also a lot of Greeks in both these places.” Tax efficiency For all clients, tax-efficient structures are always put in place first, before investment solutions. “Our strength is trust and that’s what we lead with in the high net worth market,” says Mr Lagopoulos. “A client’s affairs must be correctly organised for succession to the next generation. Banking, investment management, custody and foreign exchange follow naturally once you have got this right.” The truth of this statement is demonstrated by the fact that since the E&Y acquisition, which included 20 brokers and all their contacts, private client deposits in Jersey have leapt from nothing to E1.2bn. “These were E&Y trust clients who are now our private banking customers. This type of introduction allows us to make the type of penetration we want in the money management side.” This is always achieved through building long-term relationships with wealthy people rather than through distributing products. The investment advice given to these clients embraces the bank’s internal offerings and a best-of-breed multi-manager programme, which is still being developed in Europe. “Deposit and custody business is very straightforward to win. But the investment side is much more complex,” says Mr Lagopoulos, warming to his theme. “In order to be a strong competitor, you need a long-term performance record and new products such as hedge funds, as well as global bonds and equities. But it is virtually impossible, even for Citibank and UBS, to be best of best in everything.” He says both internal and external investment products must be available to clients. “But you need to be confident that when your product is not the best, you don’t select it. We are going through awkward times where you have to be prepared to fire yourself and hire others, where that is the right thing to do and the only way to be successful in the long-term. “Five years ago, we would have had the arrogance of a big bank, that we can make everything we sell, so why should we give away our profit? We no longer have that arrogance.”

Taking ‘full fiduciary responsibility’ While RBC has long had an excellent reputation in structured, investment banking style products, Mr Lagopoulos admits there is room for improvement in portfolio management. Banks must either build a product factory, back-office and distribution facility, or look externally for investment expertise, he believes. “Let the mutual fund companies be the specialists,” he says. “We can put their products on our shelf as part of the range our clients can use.” As an intermediary, RBC can also give clients a substantial discount on going to managers directly. “We don’t want them to be stuck with a 6 per cent front-end load. If we did, we wouldn’t be taking our full fiduciary responsibility properly.” External managers are selected by a team in Toronto, headed by Colin Carlton, who previously allocated assets for institutions and pension funds as head of actuarial consultancy Towers Perrin. “This discipline carries to the private client arena very well,” believes Mr Lagopoulos. “Colin is still determining the quality of the investment manager, not shrinking down to the personal relationship with the private client.” Because clients in Germany or the UK are more likely to hold assets in euro or sterling, portfolios are tilted to accommodate managers with funds denominated in these currencies, such as Alliance Capital, Goldman Sachs, Bank of Ireland and Morgan Stanley. “A devolution of the manager selection process is taking place, but using North American disciplines,” says Mr Lagopoulos.