What's next for Cetera Financial Group?

That question, already on the minds of many, has become even more pressing in the wake of reports that private equity firm Lightyear Capital — which once owned Cetera and sold the large independent broker-dealer to RCS Capital for $1.5 billion last year — may be on the verge of acquiring AIG Advisor Group.

Four scenarios are possible, say industry executives, the most likely being a sale to a private equity firm.

Three other options have also emerged. One, a sale to a competitor. Two, a sale to company from outside the industry or outside the country. Three, an internal reboot and reorganization of the IBD, one of the industry's largest with over 9,000 advisors and $2 billion in assets.

  • Private equity: There's already a consensus that private equity firms are poised to make opportunistic acquisitions of financial services, underscored by Lightyear's reported interest in AIG.

"There's a lot of private equity money out there right now," says M&A expert David DeVoe, managing partner and founder of DeVoe & Co. "They are strong and smart potential buyers who would be looking to buy at a discount, clean up the acquired firm and sell at a premium."
For a major disposition of a corporate division such as Cetera, a private equity firm sponsoring a management team may makes the most sense, says investment banker Elizabeth Nesvold, managing partner of Silver Lane Advisors. "It's typically a very clean deal at closing, with few contingencies for the seller," Nesvold explains. "Sponsors have the money in hand, move at warp speed to execute and the parent company is off the hook."

The private equity buyers may work with the current management team — or bring in a new one.

"It depends on how strong they think the current management team is, and how closely aligned they are," Nesvold says.

Potential suitors may even include Lightyear.

"Good private equity firms go for everything that makes sense, and do their due diligence,'" Nesvold says. "If [Lightyear] is smart they'll go for both [AIG and Cetera] and come up with one."

Other potential private equity acquirers, according to industry sources, may include Lovell Minnick Partners, Hellman & Friedman, TA Associates and Aquiline Capital Partners.

  • Competitors: Possible acquirers, but not probable.

LPL Financial, the biggest IBD player, would have been a logical suitor earlier in the year. But activist investor Richard McGuire's hedge fund, Marcato Capital, took a 6.3% stake in the IBD in the fall, describing LPL shares as "undervalued," and prompting the firm to begin a stock buyback program. As a result, the odds that LPL will make a bid are highly unlikely, industry observers say.
While Raymond James Financial Services and Ladenburg Thalmann Financial Services have histories as buyers, neither firm has expressed an interest in Cetera — to date, anyway.

John Hancock Financial Network is also very much "on the buy side," and optimistic about the IBD market, says President Brian Heapps. But John Hancock, which owns Signator Investors and just bought Transamerica Financial Advisors in St. Petersburg, Fla., will be focused on smaller IBD firms that need capital and scale and are a better fit with Hancock's "big fish in a small pond culture" says Heaps.

  • Outsiders: A wild card, but not out of the question.

A number of savvy industry insiders point to the recent sale of HD Vest by Lovell Minnick to the Internet firm Blucora. "There's going to be a lot of people coming in the industry in the next few years," says Brian Hamburger, CEO of MarketCounsel. "We don't even know who they are yet."
And don't count out foreign buyers, particularly Canadian banks, which have gobbled up U.S. firms including Bel Air Investment Advisors and Atlantic Trust in recent years. "They've clearly demonstrated an appetite to buy U.S. financial services firms, and there's no sign that's diminished," says DeVoe.

  • Internal: An unlikely scenario, but hey, you never know.

 Larry Roth, anointed as RCS CEO in November, is a battle-scarred industry veteran, brought in from AIG last year. And Doug King, president of Cetera Advisor Networks, is credited with doing yeoman's work to keep Cetera advisors from fleeing after a year's worth of bad news.
RCS would not confirm or deny that Cetera is for sale. In a statement  accompanying  the company's ill-starred third-quarter earnings report last month, Non-Executive Chairman Mark Auerbach said RCS's  "strategic plan [is] to reposition the company as a pure-play, Cetera-only focused retail advice business."

Then again, RCS may not have a choice.

The company posted a $266.5 million third-quarter net income loss from continuing operations, and its stock price, which now trades at under $1, has lost over 90% of its value over the past year. Total account assets for Cetera advisors average approximately $17.5 million, according to Financial Planning. By contrast, the average AUM per IBD advisor  is $30.1 million, according to 2013 data from Cerulli Associates.

"They're caught between a rock and a hard place," says a well-informed industry executive, who did not want to be named for fear of harming professional relationships. "What would another firm be buying? What is Cetera's true value? What is the asking price? What is the average account size? How dependent are they on annuities and insurance products? What's the average account size? People will kick the tires, but they also may walk away."

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