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Cambridge to fold in 150-advisor Broker Dealer as longtime owner sells firm

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Cambridge Investment Research is acquiring Broker Dealer Financial Services, which has 150 advisors and $3.5 billion in client assets, in the latest example of a large IBD getting bigger by absorbing a small or mid-size firm.

Cambridge, the No. 7 independent broker-dealer with $811.4 million in 2017 revenue, informed advisors and associates of the M&A deal in an email on Aug. 20, according to the firm. Broker Dealer, which has about $20 million in annual revenue, will fold into Cambridge upon closing the transaction in October.

Consolidation has been roiling the IBD space for years, but the volume of transactions across wealth management will reach a new high in 2018 for the sixth year in a row, according to Echelon Partners. The investment and consulting firm predicts a total of 189 deals this year, after 94 transactions occurred in just the first six months.

The rising level of M&A activity has resulted in a shrinking number of IBDs, to the tune of a 28% drop to 847 firms over the past decade. Changes they had already made to comply with the fiduciary rule, along with the shift to passive management and lower fees, have cut IBD operating margins to just 3%, down from 11% in 2007.

Broker Dealer and Cambridge have headquarters only about 115 miles from one another in Iowa, but, at first glance, the firms don’t share much else in common in terms of their size, fee-based business or clearing firms. Broker Dealer CEO Christina DeShaw is still relatively new to her role, after taking over when Lisa Smith resigned in June.

On the other hand, both Cambridge and Broker Dealer are privately held by longtime owners who have started employee stock-ownership plans. Owner and former Broker Dealer CEO Mike Sherzan, who retired in 2015 and ran for Congress, became chairman of the firm’s board in June, according to FINRA BrokerCheck.

The ongoing shift away from commissionable products is driving major changes in the space.
August 17

Consolidation will likely continue amid an aging business cycle and record stock market returns, according to Carolyn Armitage, an Echelon managing director. The two firms “have done their homework and have evidently identified some synergies in coming together as one entity,” she said in an email.

“This new entity will have to meet the challenge of keeping a consistent culture while retaining client trust,” Armitage says. “It will be important to remain transparent with clients as they transition to the consolidated entity, especially if it changes the way they charge their clients for the same services.”

Broker Dealer will turn into a Cambridge-affiliated enterprise, the firm’s name for its super offices of supervisory jurisdiction, under DeShaw, a current minority owner. The selling firm derives about two-thirds of its revenue from transactions and one-third from fee-based services, according to Cambridge.

“The structure of this transaction will enable the strategic intent of this new branch to be focused on organic growth with their Cambridge relationship manager versus that of recruiting and/or acquisitions,” the company said in the internal email blast.

“We recognize many important similarities between BDFS and our Cambridge Nation,” the email continued, “and one of our most important goals is to provide Cambridge as a haven and community for quality firms and advisors seeking to be independent and serve their clients, their way.”

The firms share core values and a “focus on personable service,” Cambridge told its nearly 4,000 reps and 800 employees in the email. The company didn’t make any executives available for an interview or answer specific questions, such as whether it will offer retention bonuses to Broker Dealer advisors.

Disclosures reveal key differences, however. Cambridge made 57% of its revenue from advisory fees last year, according to Financial Planning’s FP50 survey. It had an average payout of $256,000 in 2017, while Broker Dealer reported an average of $98,464 in 2015, the last year it submitted data to the survey.

Broker Dealer lists Wells Fargo Clearing Services as its only clearing agreement, while Cambridge uses Pershing and Fidelity’s National Financial Services. The selling firm manages $698.6 million in advisory assets, or 20% of its total client assets, but the buyer has $40.3 billion, or 42% of its $96.9 billion in AUA.

DeShaw didn’t return requests for comment on the firm’s deal with Cambridge. She is a 10.4% owner of Broker Dealer, having spent three years on the firm's board following a stint with Voya Financial Advisors forerunner ING Financial Partners. Sherzan had purchased West Des Moines-based Broker Dealer out of liquidation during the bankruptcy protection of its onetime parent firm, he told The Des Moines Register in 2016.

Investment Advisors Corporation, which is Broker Dealer’s RIA, launched 17 years after the IBD’s founding in 1979, according to its SEC Form ADV. The holding-company parent of both Broker Dealer and the RIA also opened in 1996, with Sherzan as its registered agent, state business records show.

Sherzan owns at least 50%, but less than 75%, of the holding company, according to BrokerCheck. Several other shareholders each own less than 25%, the ADV shows. Sherzan sold the firm to employees rather than to another company when he retired in 2015, he told the local paper on the campaign trail.

He ran as a Democrat for the U.S. Congress in Iowa’s 3rd District in 2016, losing in the primary for a race eventually won by incumbent Republican Rep. David Young. Sherzan, 66, pitched himself as an outsider businessman, spending hundreds of thousands of dollars from his own savings on TV ads.

“When I speak about equal pay, it’s because I’ve had to deal with that in my businesses over 26 years,” he told voters at a meeting of the Polk County Democrats, according to The Register article. “When I talk about paying people and making them owners of the company and allowing them to participate in an ownership process where they’re paid fairly, it’s because I’ve done it in my career.”

The firms did not release the terms of the deal. Broker Dealer and Cambridge have started the transition, though it wasn’t immediately clear when Cambridge last made an acquisition or whether it would hire staff for the onboarding.

“We consistently receive inquiries from many firms, and we continue to focus on shared purpose, values, and culture, which we believe is crucial to long-term mutual success,” the firm said in a statement.

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