After 3-year search, advisor-owned IBD bets on scale in PE deal

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In a sector that’s increasingly difficult for smaller and midsized players, a financial advisor-owned firm waited years to find a buyer that could keep its culture intact while bringing greater scale.

The 500-advisor independent broker-dealer NEXT Financial Group and IBD holding company Atria Wealth Solutions struck a deal that will add to the growing number of private equity-backed companies in the space. NEXT says it will also help the Houston-based firm keep up with its bigger rivals.

Before President Barry Knight met Atria Wealth founding partners Doug Ketterer and Eugene Elias for the first time in late 2017 through a mutual acquaintance, NEXT “had about given up hope” on finding a partner, Knight says. The IBD and the Lee Equity Partners-owned firm unveiled their agreement Jan. 8.

All representatives who acquired shares of the private firm would receive payouts upon the deal’s closure, which is expected later this quarter. Atria’s fourth acquisition since opening in 2017 could also allow the selling firm to boost its technology like the giants of the sector.

“Years ago, you could take software off the shelf and be competitive with anybody,” says Cherry Hill, New Jersey-based advisor Jeffrey Saline, the chairman of NEXT’s board. He notes recent tech investments of some $100 million per year by firms like LPL Financial and Ameriprise.

“As a small independent broker-dealer, you just don’t have those resources,” Saline says. “But Atria does have those resources.”

These insiders are well placed to propel their firms forward and encourage colleagues to address the industry’s shortcomings.
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Expenses relating to tech — along with compliance and attracting and retaining talent — have fed the pressure on IBD margins pushing them down to 3% from 11% in the past 10 years, according to consulting firm and investment bank Echelon Partners.

Challenges faced by IBDs and an influx of PE capital flowing into wealth management fueled the sixth straight consecutive record year for M&A deals in 2018, Echelon says. An aging advisor population and market volatility could keep the streak going in 2019, says managing director Carolyn Armitage.

Lee Equity’s portfolio includes part of Edelman Financial Services, which it took private in a $258-million deal in 2012. The PE firm also once held a board seat with LPL which was “really influential in helping to shape their growth,” according to Armitage, who notes that such buyers often seek expense savings.

“How do you give scale if you're not consolidating some back-office functions?” Armitage says. “They seem to be a very good partner as far as a private equity firm — and they do have a successful track record.”

NEXT also has a long tenure in the space. After several advisors launched the firm in 1999, it “used to be quite common for the reps that were onboarding to buy stock,” according to IBD recruiter Jon Henschen. The firm has not offered shares as frequently in recent years, he adds.

“They used the proceeds to fuel their recruiting,” Henschen says. “The reps that invested that money would obviously like to see a payday, so they got it.”

Saline, the board chairman, declines to say how many NEXT advisors are shareholders and how much they could stand to make from the deal. The parties did not disclose the terms of the deal, though Ketterer says Atria will make offers to all shareholders for 100% of their holdings upon closing.

Former Morgan Stanley executives Ketterer and Elias, along with AIG Advisor Group veteran and fellow Atria founding partner Kevin Beard, would fold NEXT in as an independent subsidiary. Institution-focused IBDs CUSO Financial Services and Sorrento Pacific Financial and independent firm Cadaret, Grant already operate that way.

With the addition of 500 advisors and some $13 billion in assets under administration from NEXT, Atria says its subsidiaries will expand to more than 1,900 representatives and $65 billion in AUA. Atria’s team believes “advisors need more help" from the headquarters, Ketterer says.

“We think the world has changed. They need a different level of engagement with the home office, they need different resources,” he says. “We think scale is a means to an end. We are not a roll-up, we are not an aggregator and we are not a consolidator.”

A “supposedly quick” meet-and-greet with Knight stretched into several hours when the two sides first came together, according to Ketterer. Despite embarking on a search for a suitor 3 1/2 years ago, NEXT was “willing to continue doing this alone” if it couldn’t find the right partner, Knight says.

NEXT had built out “tremendous services” around marketing and succession planning, he says, “but because of a lack of scale, we knew there were certain things that we couldn't do as well. It became clear rather quickly that we really were talking the same language.”

The new capabilities Atria expects to bring to NEXT include simpler business processes, enhanced client-facing tech and better advisor portals. New heads of investment solutions and advisory services with Atria — as well as its use of Envestnet’s tools — will also bolster NEXT’s fee-based business, Knight says.

Atria’s combined offering of bank and credit union-focused IBDs and independent firms reminds Henschen of Cetera Financial Group, though Ketterer notes that Atria is not an IBD network. Knight would keep his current role with the firm after the deal, which also won’t move its headquarters or change its office of supervisory jurisdiction structure.

“We still have the eyes and ears for the reps to the ownership,” Saline says. “That's what I always thought made NEXT unique, and we get to keep the uniqueness.”

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M&A Private equity funds Private equity fundraising Independent BDs Independent advisors Doug Ketterer Next Financial Group Atria Wealth Solutions Lee Equity Partners