Cetera firm to drop IBD as smaller players eye boosted resources

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As the independent broker-dealer sector's challenges make scale increasingly important to firms, Cetera Financial Group is consolidating.

The network's smallest IBD subsidiary will fold into its largest IBD. The 450-advisor Summit Brokerage Services plans to drop its IBD to become one of the 41 offices of supervisory jurisdiction referred to by Cetera Advisor Networks as its regions, the firms said on July 12. Pending FINRA approval, Cetera expects the transition to happen this summer.

While the firms say it won’t be a financial transaction between the parties or a repapering of client assets, Summit advisors will receive transition assistance from Cetera to defray costs. The firms will evaluate the amount on a case-by-case basis, according to Summit President Marshall Leeds.

Cetera’s IBD count would drop to five with 7,500 advisors from 11 with 9,300 producing representatives just five years earlier under the move. Summit’s revenue slipped by 6% year-over-year to $152.8 million in 2018 — even as the sector had its largest growth since 2014.

Industrywide, the number of IBDs has shrunk by 30% to 819 firms in the past 11 years as margins fell to 3% from 11%, according to investment bank and consulting firm Echelon Partners. Giants of the sector like Cetera are leading its expansion as smaller players seek out their scale and resources.

Cetera Advisor Networks has absorbed another Cetera IBD and two other former IBDs in the past three years. Incoming firms receive enhanced technology and back-office services amid the heightened regulatory burden of recent years, says President Tom Taylor.

“As I talk to small broker-dealers, it's the accumulation of all of it,” Taylor says, noting that Leeds has told him the move will free up 40% of his time to spend more of it on Summit's advisors. Taylor adds that the new regions have found success because they “want to really get away from the compliance and regulatory burdens to focus on the fun part of the business.”

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Boca Raton, Florida-based Summit’s business ticked down last year largely due to year-end volatility, according to Leeds, who will stay on as president. In 2019, the firm is on pace to set records in recruited client assets and gross dealer concessions, he says.

“All the advisor feedback has been extremely positive,” Leeds says. “We're looking to build together something very special that's very different in the industry, and Tom's firm is giving us the platform to do it.”

In addition to the 26-year-old Summit being one of only two IBDs to disclose lower revenue in 2018, it also settled a FINRA case earlier this month alleging it failed to review trade alerts. Less than a third of its business came from advisory fees — compared to about 45% at the top 50 IBDs.

On the other hand, Summit’s reps manage about $17.5 billion in client assets, and they have given the firm high marks in independent studies about its advisor support. Legendary former Miami Dolphins Head Coach Don Shula also acts as a spokesman for the firm.

Capabilities like subscription-based planning under AdvicePay and easier client onboarding through Cetera’s AdviceWorks client portal will help Summit boost its advisory offerings, according to Taylor.

Changes under a new structure can pose the risk of disrupting a firm’s culture, though. Rivals have eagerly poached new recruits from the regions in situations where the new setup frustrated advisors. Cetera is also operating while searching for a new CEO after Robert Moore stepped down due to undisclosed health reasons.

Cetera advisors have already weathered a lot of flux, though. Chairman Ben Brigeman is serving as interim CEO while also sitting on the strategic advisory board at Genstar Capital, the private equity firm that purchased a majority stake in Cetera last year for a reported $1.7 billion.

Institutional debtholders made the biggest deal of the year in 2018 in the IBD sector after lifting Cetera’s parent entity out of bankruptcy protection two years earlier. Onetime parent RCS Capital had purchased Cetera for $1.15 billion in 2014, the same year it bought Summit.

Under the new setup, Summit advisors will keep the same contacts at the home office, where there won’t be any job losses or cost-cutting, according to Leeds. He and Taylor identify tech as a key area where advisors will receive new platforms, software and integrations more quickly than they do right now with the firm as Cetera's smallest IBD.

“Summit advisors, because of their different back-end systems, have always been last because we have to do extra integrations,” Taylor says. “They will, automatically, as we roll out technology, get it at the same time that our advisors get it.”

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Independent BDs M&A OSJs Business development Summit Brokerage Services Cetera Advisor Networks Cetera Financial Group