Cetera added $12B from Foresters. Is the firm now hitting its stride?

Cetera Financial Group has already added more advisors this year than in either of the previous two years, fueled by acquisitions and a critical recruiting push.

Despite its plan to take on $105 million in additional non-investment grade debt to pay for its acquisition of certain assets of Foresters Financial’s U.S. broker-dealer and RIA, the network’s parent has actually improved its leverage, Moody's Investors Service said earlier this year.

Aretec Group — the entity that emerged from bankruptcy in 2016 — aims to grow by recruiting advisors with the lure of bonus loans, according to a June credit opinion issued by Moody’s. Cetera also retained more than 400 advisors and $12 billion in client assets from Foresters.

The close of the deal in August came after the network of five independent BDs, comprising some 8,000 advisors, agreed to purchase an 85-representative firm in February. In all, Cetera has amassed 1,000 new advisors and $19.1 billion in client assets this year, the firm says.

RIAs

No end in sight: Torrid RIA M&A market set to exceed 200 deals in '19

July 9, 2019 6:08 PM

However, Cetera is also searching for a new CEO. The firm faces challenges in recruiting as it competes against the likes of LPL Financial, which has boosted its bonus loan offers and taken in more than $15 billion in recruited client assets in the first half of 2019, separate of any M&A.

Last October, private equity firm Genstar Capital purchased a majority stake in Cetera for a reported $1.7 billion, and in May, Moody’s cited a steadying advisor base and a growth strategy in maintaining its “B3” rating and stable outlook. The 2019 additions are a company record.

“Finally our story is resonating in the market,” says Cetera President Adam Antoniades, who credits acquisition and recruiting gains alongside technology upgrades like subscription-based fee software, goals-based annuity comparison tools and an enhanced advisor desktop.

“We're seeing all these different elements resonate, and it's driving strong growth for us,” he continues. “It's been a long time and a lot of work over the past couple of years to bring it together, but we're hitting stride and that feels good.”

Antoniades declined to provide more specific metrics, such as net recruiting figures or the exact number of advisors who came into Cetera’s bank and credit union channel from Foresters, citing non-disclosure agreements and the Los Angeles-based firm’s status as a private company.

In an email, representatives for the firm also declined to provide exact figures on the recruiting loans or the financing of the Foresters deal. They referred to the $12 billion in client assets as 95% of the total assets under administration at the parts of the firm acquired by Cetera.

Cetera’s big offices of supervisory jurisdiction — like Ron Carson’s burgeoning network — have been reeling in recruits, says IBD recruiter Jon Henschen. Cetera is offering reps higher loan amounts than LPL on fund and annuity assets and a similar amount for advisory AUM, he says.

“They are leveraging their super OSJs quite a bit and getting quite a bit of success there,” Henschen says. “They're paying above industry average on their notes.”

LPL also doesn’t disclose the level of its recruiting offers, though CFO Matthew Audette described them on the firm’s last quarterly earnings call as “quite competitive in the marketplace,” but hedged by volatility. LPL added $33.3 billion in recruited client assets in the past 12 months.

“We're seeing our competitive positioning strengthening, so we're actually seeing and getting swings at more opportunities, given those advisers that are exploring to affiliate,” CEO Dan Arnold said on the same earnings call, noting that the recruited client asset figure was a record for LPL.

Arnold also spoke at length about LPL’s view that private equity-fueled consolidation is causing more advisors to consider switching IBDs.

Cetera’s recruiting and retention ability — along with its adjusted debt-to-EBITDA ratio — act as Moody’s main listed criteria for rating Aretec’s credit. The leverage ratio stemming from more than $1.2 billion in debt financing fell to about 6.5x after the Foresters deal, from 7.5x last August, Moody’s says. Three- and five-year forgivable loans are boosting its growth plans, and Aretec’s leverage appears likely to be around 6x or 6.5x during 2019.

“Aretec's stable outlook reflects its stabilizing financial advisor base following its predecessor's May 2016 emergence from bankruptcy, and the related stability of its client assets under administration,” according to the Moody’s credit opinion from June. “We expect further net revenue and EBITDA growth to be broadly driven by Aretec's recruiting of financial advisors.”

Cetera recruited around 800 advisors for the full year in each of 2017 and 2018, prior to the exit of then-CEO Robert Moore due to undisclosed health reasons in March. Cetera chairman Ben Brigeman, a member of Genstar’s strategic advisory board, is serving as interim CEO.

Antoniades is also taking the lead as the Foresters deal ushers in what he calls a new “branch model,” treating the firm’s 40 offices as “almost like a separate company.” Although the ex-Foresters offices affiliated with Cetera Financial Institutions, the firm calls the branches Cetera Investors.

The branch model — while not a form of employee BD affiliation — will allow the reps to receive heavier home-office support while providing more on-ramps for new entrants to the profession through a training program, Antoniades says.

“The days of learning and earning your way into the business are long gone. ...The branch office structure and the Foresters business model lend themselves very well to it,” he says. “They look and feel like independent advisors. It really enables them to spend time with their clients and not be concerned with being a small business owner.”