1,400 advisors on the move as Advisor Group merges 3 IBDs into Securities America

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A deal that reshaped the independent broker-dealer sector is realigning thousands of financial advisors in its wake.

After two credit downgrades and a pledge by its CEO to fold Ladenburg Thalmann into its structure, Advisor Group is merging three of the IBDs it acquired earlier this year for $1.3 billion into the largest one of the ex-Ladenburg network.

By consolidating Investacorp, Securities Service Network and KMS Financial Services into Securities America, the Phoenix-based firm will more quickly deploy technology and other services for the 4,400 financial advisors affiliated with the current crop of five IBDs, CEO Jamie Price said in an interview.

Price rejects any connection between the impact of the coronavirus on Advisor Group’s business and the decision to integrate the firms. At the same time, he acknowledges the importance of illustrating the value of the private equity-backed network to retain the three firms’ roughly 1,400 advisors. He says the decision isn’t based on cutting costs or advisor services. .

“We're going to maintain many of the people that service them today,” Price says. “We obviously have openings all the time, number one. Number two, we need to support those advisors, and it takes people to do it.”

Since announcing the deal in November, Price has said Advisor Group would not merge any Ladenburg firms into the acquirer’s four IBDs. No further consolidations are in the works after Securities America absorbs the three firms in phases this year, he says. The fifth ex-Ladenburg firm, Triad Advisors, will remain a standalone subsidiary.

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The process “will be a very small lift” for advisors and their clients because it won’t require repapering of assets or signed client consent forms in nearly all cases, according to Price. Still, the firm is providing transition assistance for representatives who stay and retaining the advisor councils of each of the shuttering IBDs.

Pending approval from FINRA, Securities America will integrate Investacorp in mid-July, Securities Service in mid-September and KMS in November. Other than a few advisory clients at KMS required to sign over their accounts to the new IBD, all assets will migrate to Securities America automatically unless clients raise an objection, according to the firms.

It’s too early to say whether executives such as KMS CEO Erinn Ford, Securities Service CEO Wade Wilkinson and Investacorp CEO Patrick Farrell will stay with Advisor Group after the transitions, Price says. Alongside Securities America CEO Jim Nagengast’s team, the current managers will help set the level of transition assistance for advisors during the process.

“It's not easy to come to these conclusions, and they've been right in the game, in the discovery, from the day that we decided this might be the right tack,” Price says. “We're hoping they remain part of the fabric of the company going forward.”

Home-office support across the Ladenburg firms translated to a ratio of one staff member for every five advisors, compared to one for every nine at Advisor Group, according to IBD recruiter Jon Henschen. The move is a surprise, though, since it came so soon after the deal closed in February rather than after a traditional “honeymoon” of six months to a year, he says.

“All three of these are midsize broker-dealers; advisors go to midsize broker-dealers for the high-touch relationship,” Henschen says. “Some of these reps don't use the back office much, whereas others do use it a lot. It will probably be an issue for them.”

The consolidation brings “a lot of cost savings” for Advisor Group, he adds. Moody’s Investor Services and S&P Global Ratings downgraded the private equity-financed firm’s credit rating in March. S&P might downgrade Advisor Group again from its “B-” rating if the firm’s debt leverage ratio gets too close or above 7.5 times its earnings, or if there’s significant advisor attrition.

The Reverence Capital Partners-owned firm’s financial condition could also play a role in that retention effort, if Advisor Group’s substantial debt impedes its ability to live up to Price’s promises about the level of service to advisors after the Ladenburg deal.

The firm generates 20% of its revenue from cash sweeps tied to interest rates and 45% from asset-based fees correlated to equity values, S&P analyst Clayton Montgomery wrote in the March 30 rating action. Therefore, its losses to EBITDA could amount to $90 million from the recent interest rate cuts and between $40 million to $90 million from tumbling stock values.

Any “mitigating actions to help dampen the blow to earnings” would only offset them on a limited basis, so it’s not likely the firm will “voluntarily pay down debt in 2020,” Montgomery wrote. The company has a stable outlook, however, because S&P anticipates that it will “stay in a sufficient liquidity position” and keep a “comfortable cushion relative to its springing leverage covenant.”

With the consolidation, all advisors will be able to access the firm’s digital onboarding, marketing resources, succession-plan consulting and its Envestnet platform, according to Price.

He acknowledges some “will kick the tires, for sure, internally” as they weigh any new affiliations against Advisor Group tech like its eQuipt onboarding or its MyCMO marketing. Maintaining multiple brands will ensure a culture with “a little bit more intimacy so you're not lost in a sea of people,” he says, noting that recruiting moves come down to more than bonuses.

“I’m a firm believer that people who are leveraging money or trying to buy their way to greatness aren't building it internally,” Price says. “They'll have to give us some trust.”

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Independent BDs Recruiting M&A Jamie Price Advisor Group Securities America Investacorp KMS Financial Services Securities Service Network Ladenburg Thalmann Financial Services