Doctors Resist Scotiabank MD Deal
February 3, 2019
Among the swag Paul Healey received on his first day of medical school was a backpack with the logo of a financial company he’d never heard of: MD Physician Services.
A few years later, when Mr. Healey started working and earning money, he found himself turning to MD for investment advice. Born 50 years ago to help time-pressed doctors manage their savings, the firm was an arm of the Canadian Medical Association (CMA). For many physicians, it was the only place to consider taking their money.
“People really did not question what MD was doing,” Mr. Healey said. The firm marketed itself as being run by doctors, for doctors. "It was just assumed they were working on behalf of physicians.”
That deep trust has been dented. Last May, Bank of Nova Scotia announced it would buy MD for $2.6-billion. It was a jaw-dropping price and, for many doctors, the deal was an unexpected development. For decades, MD – which has gone by the name MD Financial Management since 2014 – made its independence from major financial institutions a key selling point. Yet, here it was, selling out to a Big Six bank.
Mr. Healey is now an emergency room doctor in Oakville, Ont. Together with his wife Jane, a pediatrician in Mississauga, he runs an online forum called Physician Financial Independence that aims to simplify personal finance and investments for doctors. Since the announcement of the MD sale, he says, its message boards have lit up. “MD is no longer viewed as an advocate for physicians,” he explains. “The most common post today in our group of 9,500 members is, ‘How do I move my money from MD Management?’ ”
Scotiabank says it has lost minimal assets from MD since the deal, which closed in September. Even so, any sign of a backlash is potentially troublesome for the bank, which paid a rich price for MD during a $7-billion acquisition spree in fiscal 2018. Money management firms are often purchased for between 1 per cent and 3 per cent of their assets under management (AUM), but at $2.6-billion, MD was acquired for 5.3 per cent of its total assets. After stripping out some low-margin assets, some analysts believe Scotiabank actually paid more than 6 per cent of AUM.
The bank says the price tag is justified; owning MD checks some important boxes for Scotiabank. Across Canadian banking, wealth management is viewed as the hot ticket, a business that will reliably boost profits over the next decade as the lending boom in retail banking cools. There are few independent money managers remaining in Canada that could approach MD’s scale, with $49-billion in client assets.
The firm was estimated to generate earnings before interest, taxes, depreciation and amortization of about $120-million in 2018.
MD also serves a very lucrative clientele. Within wealth management, high-net-worth clients, or those with investable assets worth $1-million or more, are highly sought after because banks can profitably cross-sell products such as chequing accounts, mortgages and credit cards. Wealthy clients not only invest more, they also tend to borrow more. Sixty-three per cent of MD’s assets are from clients who have more than $1-million invested with MD.
Scotiabank has been working hard to assure investors the deal will pay off. Analysts have been worried that some of the bank’s purchases will be tough to integrate, and lately there is extra focus on the MD deal. “I get more questions on MD than anything else,” chief executive Brian Porter said at an investor conference in January.
At the same time, the bank is pouring its energy into reassuring MD clients they are in good hands. The last thing some MD clients wanted was to be targeted for their wealth – yet, that is what’s transpired.
MD’s roots date back to the 1950′s, when the CMA discovered that doctors weren’t saving properly. Because physicians are self-employed, they do not have company pensions. To protect them, the CMA lobbied the federal government to allow tax deferrals for retirement savings. The campaign helped to plant the seeds for the creation of the registered retirement savings plan (RRSP).
In 1969, the CMA went further, opening a financial planning firm focused solely on physicians and their family members. Under the CMA umbrella, MD Financial had privileged access to the annual pipeline of new doctors starting medical school, and the firm found ways to catch their eyes, with everything from free backpacks to financial planning seminars.
It also helped that MD had a particular ethos. Notably, its fees were reasonable and its advisers did not work for commissions; they were salaried employees who earned annual bonuses largely based on the firm’s overall performance. “There were no high-pressure sales tactics,” says Ken Markel, an emergency room doctor from Richmond, B.C., who has been an MD client for three decades. “We trusted them, and they had our backs.”
That philosophy bred loyalty. By last year, more than 80 per cent of MD’s clients had a relationship with the firm that had lasted 10 years or longer.
It isn’t clear what prompted the CMA to field offers for the business, and the association declined to make its executives available for interviews. (In an online post, the CMA wrote they wanted to focus on advocacy and the proceeds of a sale would be used to develop health programs for its members.) Scotiabank emerged as the winner of the auction last spring.
The buyer’s rationale was plain to see: Scotiabank CEO Mr. Porter wanted to beef up the bank’s wealth management business. His predecessors had tried to do the same, with mixed results. Scotiabank’s $2.3-billion outlay for full ownership of DundeeWealth had struggled somewhat because of cultural differences. The bank’s large minority stake in CI Financial Corp. also could not be converted into a full-blown control of CI because of management differences between the two companies. (Scotiabank eventually sold the majority of its position in 2014 for $2.6-billion.)
MD and the CMA, meanwhile, found themselves with some enraged clients who felt the firm had been sold behind their backs. “I found out about the sale from a press release posted on Facebook,” says Tahir Khawaja, who became a client of the firm in 2002 when his wife, Tahmeena Ali, had just graduated medical school.
Initially, Mr. Khawaja says he was angry with MD, but now his frustration is directed toward the CMA board – especially because the deal also came with a 10-year contract that gives Scotiabank the exclusive right to market its services “to young physicians who would know no better."
As a result, Mr. Khawaja, who handles the finances for both himself and his spouse, has moved over one of their investment accounts to Questrade Inc., an online discount brokerage, and is contemplating what to do with his remaining assets at MD.
Complicating matters, many doctors are already frustrated with the CMA, feeling as though the organization has let them down in the fight with provinces that have been trying to slash health costs. The situation had grown so complicated in Ontario that doctors have been working without a contract for more than four years. “Physicians on the whole have felt talked down to and disrespected," says Patrick Murphy, who was raised in Nova Scotia but recently finished his residency in general surgery at Western University.
In an e-mail to The Globe and Mail, a CMA spokesperson said that its board has “personally engaged with members about the sale, answering their questions and addressing their concerns.”
In response to a critical letter to the editor of a B.C. medical journal, CMA chair Brian Brodie defended the sale in December, noting that new technologies such as bitcoin and cryptocurrencies are changing the way money must be managed.
"We’re now able to ensure that MD can serve many future generations of doctors and their families, and offer new products and services to better meet their needs, including for early-career physicians,” he wrote.
The pressure is now on Scotiabank to calm disgruntled clients – and to prove the deal was worth it.
On strategy, Glen Gowland, the bank’s global head of wealth management, says the purchase is still a no-brainer. “Every single client is a client that Scotiabank is interested in retaining,” he said in an interview.
Also, because MD is operating as its own company within Scotiabank, Mr. Gowland says the firm will stay true to the roots. “It’s very difficult for any company to compete with a firm that has been focused for 50 years on one segment," he says.
Over the past six months, Mr. Gowland, along with MD Financial’s CEO, Brian Peters, have travelled across Canada visiting every MD office to meet with its advisers and clients. In addition, the bank posted an extensive online document on the MD website to address concerns physicians had voiced. In one particularly blunt section, Scotiabank wrote: “You’re not just ‘another client of a big bank.' "
While Mr. Gowland acknowledges there was been some client frustration, he said 99 per cent of the MD assets that Scotiabank acquired remain with the firm.
“The questions clients have [are] more about, ‘Is my advisor going to continue to provide me the advice and counsel as they have in the past?’ ” he said. "And what we have really focused on is we are not taking anything away from what MD does today. All we are doing is adding services for them that are better, more focused, lower cost and be able to round out the offering.
“The clients are very loyal and continue to be.”
So far, at least. The next twelve months will be crucial because Scotiabank is not only contending with some frustrated doctors, but also with rivals who are ready to pounce.
Late last year, Toronto-Dominion Bank launched its own wealth management platform aimed specifically at health-care practitioners. While it may not have the 10-year CMA promotion partnership that Scotiabank has, the bank has other avenues to target doctors. Through various areas in the company, such as its insurance arm and business banking, TD says it has existing relationships with 60,000 medical professionals, most of whom are doctors.
TD’s hope is to pick off MD clients who have a reason to think twice about their service. “Whenever you have market events, whether it’s a development, a launch or the sale of a business, you will have clients within that subset that will take pause for a moment and say, ‘Am I being serviced as effectively as I possibly can?’ ” says Leo Salom, group head of TD Wealth Management.
Royal Bank of Canada is aggressively pursuing the market as well. The bank has had a health-care financial practice for a decade, but sees an opening. To appeal to the youngest cohort of doctors in a unique way, the bank has teamed up with WestJet Airlines to offer medical school students complementary gold status as they fly around the country for residency interviews – a small perk it hopes will be memorable later on.
Before the Scotiabank deal, such perks probably wouldn’t have meant that much. MD was in a class of its own. “The impression was that everybody else other than MD Financial charged you way too much money and pressured you,' " says Mr. Markel, the Richmond-based doctor.
Now that MD is owned by a bank, doctors are paying more attention. Mr. Markel say he hasn’t moved his money yet, and he still may not. But for the first time in 30 years, he’s thinking about it.
