Can Cetera grow during the coronavirus pandemic?
Despite a credit downgrade and reports that key executives have left Cetera Financial Group, CEO Adam Antoniades says the firm remains focused on getting “a bigger slice of the pie.”
The parent of the independent broker-dealer network with 7,659 advisors, received an issuer rating of “B-” on its more than $1.1 billion in debt — down from “B” — from S&P Global Ratings April 3. In a sign of the economic impact across wealth management from the coronavirus, S&P predicts Cetera could lose some $30 million to $35 million in adjusted EBITDA per quarter.
Still, the rating agency judged Cetera’s outlook to be stable, just as it did when downgrading rivals Kestra Financial and Advisor Group days earlier. In an interview, Antoniades described a corporate realignment of Los Angeles-based Cetera’s five IBDs, including new Advisor Growth teams. Last month, the firm also rolled out a “resiliency pack” for advisors.
“Our ingredients are coming together and giving us the ability to be agile and nimble,” says Antoniades, who took over as CEO in December after logging more than 20 years with Cetera and its predecessor firms.
“You're going to need financial advice more now than you ever had,” he adds. “A lot of retirement plans are going to be turned upside down, and the only way to fix them is financial advice, good solid financial advice.”
Cetera’s parent — its name spelled backwards, Aretec Group — hasn’t drawn on the revolver in its $919 million in first-lien debt, according to the S&P. The lower Fed funds rate and the drop in S&P 500 value stemming from the pandemic will lead to smaller adjusted EBITDA coverage of around 2.4x while driving up Cetera’s adjusted debt-to-EBITDA ratio to 6.5x to 7x, S&P says.
“To maintain this level of profitability, the company will have to execute on its expense management plan by reducing operating expenses,” S&P analyst Adam Grossbard wrote. “We expect the company's flexible cost structure will be able to maintain adequate debt-service coverage and liquidity necessary at current market levels."
While Grossbard adds that an upgrade is unlikely, factors that could lead to another downgrade include activating its debt covenant, drawing on the revolver or if “we observe meaningful attrition of advisors from the company's platform,” he says.
By mid-May, the S&P 500 Index had regained a majority of its losses in value since the rating action early last month. The public health crisis and economic turmoil from the coronavirus remain areas of great uncertainty, though.
IBD rivals with less leverage on their books see a recruiting opportunity among advisors affiliated with private equity-infused firms like Genstar Capital-backed Cetera. For example, midsize competitor Infinex Financial Group said last week that it had poached CBC Bank’s investment program from Cetera’s bank and credit union channel.
On the other hand, Cetera has also unveiled some significant recruits. It achieved record recruiting in 2019 by adding about $100 million in gross dealer concessions, according to Antoniades. In the first quarter, the firm brought in some $2 billion in net new client assets.
Cetera’s debt enables flexibility because its debt service is tied to interest rates, and the firm doesn’t have to “accommodate stock buybacks” like publicly traded firms, Antoniades says. Far from dismissing repeated credit actions coming in the pandemic’s wake, he cites Cetera’s history of moving past the bankruptcy protection of its former parent four years ago.
“What I'd say to an advisor is, ‘Look, you want the organization that you're affiliated with to be fiscally responsible,’” Antoniades says. “We've navigated the most adverse conditions and come out the other end with shining success.”
The firm will be managing the current crisis with different executive ranks, though. Cetera’s COO, head of business development, national recruiting director and two other executives left the firm in April, InvestmentNews reported.
Laying off senior managers or reducing the number of roles often serve as methods of cutting expenses. While Antoniades declined to discuss any details of Cetera’s personnel shifts, the firm announced some new appointments and promotions on May 12.
Antoniades says he’s received praise from advisors for the suite of technology, consulting, marketing, networking, CARES Act resources and other services in the firm’s resiliency pack. Antoniades has been talking about the potential impact of macroeconomic disruption since at least last year, when he said that Cetera has clearly “checked the box relative to resiliency.”
The corporate realignment revolves around combining growth-focused resources at the home office and boosting investments in tech for them, according to Antoniades. Three new Advisor Growth officers, including former OppenheimerFunds executive Malissa Lischin, are also leading teams dedicated exclusively to helping practices bulk up their organic growth.
“For us, it's really about accelerating our strategy, which is a growth strategy,” Antoniades says. “The changes that we're making are very deliberate, they're very strategic and I would go so far as to say they're bold and progressive at a time when people are saying, ‘What's next, What's coming down the pike?’”