Looking for a leading indicator for the independent broker-dealer market? Keep an eye on financial services industry legend Donald Marron. His distinguished career on Wall Street was capped by two decades at the helm of PaineWebber, which he eventually sold to UBS in 2000. Two years later, Marron founded Lightyear Capital, and proceeded to oversee the firm’s rise as a private equity powerhouse.
Lightyear bought ING Advisors in 2010, rebranding it as Cetera Financial Group, and nurturing its growth as a leading IBD network. Three years later, in a blockbuster deal that effectively reshaped the IBD market, Lightyear sold Cetera to Nicholas Schorsch’s RCS Capital for an eye-popping premium price of $1.15 billion.
Schorsch, a seasoned deal-maker himself, told Financial Planning’s editors last year the price was “fair” for a big brand-name network in a fast-growing market. Marron, meanwhile, moved on this spring to his next project, buying a majority stake in Wealth Enhancement Group, a $4.7 billion LPL super-OSJ in Minneapolis.
His trajectory underscores Marron’s reputation for prescience, observers say — but it also highlights where the action is in the independent B-D space.
While no one has quite matched the frenzied level of Schorsch’s unprecedented buying spree, the IBD networks have dominated recent deal-making among the upper ranks of FP50. Ladenburg Thalmann Financial Services, for example, focused on external growth and snapped up smaller firms, while AIG Advisor Group and Cetera Financial Group spent considerable time and resources on internal priorities and reorganization.
These networks have been active deal-makers at a time when the standalone leaders have been largely laying low, showing the appeal of an alternate path to scale.
The FP50 rankings weigh each independent broker-dealer separately — but a look at the networks in aggregate shows their heft.
LPL Financial remains the industry heavyweight, with $4.3 billion in revenues; its roughly 14,000 advisors have put it roughly neck and neck with Merrill Lynch. And Ameriprise remains in the No. 2 spot, with $3.7 billion in revenues.
But below that point the top rankings change considerably when the networks are considered as single operations. Cetera Financial Group slides into the No. 3 spot, with $2 billion in revenues; Raymond James Financial Services is No. 4, with $1.6 billion; and AIG Advisor Group is now No. 5, with $1.3 billion.
Northwestern Mutual, AXA Advisors and Cambridge Investment Research slide out of the top 10 altogether.
LADENBURG’S BIG YEAR
Ladenburg, meanwhile, lands at No. 8 after a “pretty extraordinary year for growth,” as CEO Richard Lampen puts it. The network in 2014 cut deals to acquire both Seattle-based KMS Financial Services, for approximately $24 million, and Securities Service Network in Knoxville, Tenn., for around $45 million. Ladenburg also bought a Birmingham, Ala.-based wholesale insurance broker, Highland Capital Brokerage, for roughly $42 million.
As a result, the IBD network, already anchored by Triad Advisors, Securities America and Investacorp, has grown to $885 million in revenues and 3,380 producing reps.
A big reason for Ladenburg’s recent success, Lampen maintains, is its diversification. “We alone among independents have an investment bank, a trust company and an insurance brokerage,” Lampen says. “We can give advisors access to capital markets and syndicated products, institutional equity, fixed-income trading and international asset management.”
And with Highland Capital on board, Lampen adds, “We can now support the insurance side of the business with industry leading expertise and point-of-sale support.”
The distinctiveness of Ladenburg’s different brands is also a strong selling point for the fast-growing network, he argues.
“One of our core values is maintaining the independence of the independent broker-dealer,” he says. “They each have their own unique culture and history, and our advisors have a personal relationship with leadership. That is an important part of the glue that keeps [them] with the firm.”
BIG COMPANY, SMALL CULTURE?
Indeed, several executives noted that a network strategy allows them to get big without losing the personal relationships that characterize their smaller component operations.
“We really think it’s critical that each of [our] broker-dealers have their own president and their own president’s circle or business development team,” says Erica McGinnis, chief executive of AIG Advisor Group, home to FSC Securities, Royal Alliance, SagePoint Financial and Woodbury. “They need the tools and resources that a big firm can provide, but they also want ... direct access to their own president. They like being one in 1,300, not one in 13,000.”
At Cetera, which now holds 11 separate firms after a 2013-14 buying spree, CEO Larry Roth echoes the message. “We believe in the network approach,” he says. “It is a much more efficient driver of recruiting, retention and organic growth. We believe it’s damaging to in any way dilute a broker-dealer’s culture and the personal relationships that it fosters, because that’s what translates into growth.”
Yet Cetera’s recent growth spurt poses a challenge — as does its connection to RCS Capital (which owns Cetera) and American Realty Capital, a separate Schorsch-backed firm tainted by an accounting scandal last year.
According to one recent industry poll of advisors, Cetera advisors were the most likely among their IBD advisor peers to leave their current firm.
Advisors who are deciding which firm to affiliate with face a difficult decision, says Tom Daley, chief executive of the Advisor Center, a recruiting service and online platform for advisors in the IBD market.
“I think Larry Roth is a good guy, but there are a lot of unknowns at Cetera that they are working through,” says Daley, who spent more than a decade as a recruiter for LPL. “Advisors may be asking themselves why participate [with Cetera] when a lot more information needs to be clear. There is an element of risk associated with the unknown.”
After all, says Daley, a key issue for advisors considering a move is how the independent B-D can support the growth trajectory of their firm and where they think the IBD can support it. “No one is getting rich off moving,” he explains. “What advisors really focus on is: Does the IBD emphasize the areas where I see myself growing?”
“Everyone talks about culture,” Daley continues. “But I tell advisors the real question is: What is the B-D’s philosophy? Where do they spend their money? Where does the money come from? What does the parent company do and are advisors required to sell anything as a result?”
Roth defends Cetera’s rapid expansion, arguing that its size gives the network critical scale, bargaining power with vendors and the ability to offer advisors better support.
But did the giant IBD absorb too many firms too soon? McGinnis, who worked closely with Roth when he was chief executive at AIG before he jumped to RCS in 2013, thinks it did. “I don’t believe you can build that kind of scale and integration in one to two years,” she says, adding that integrating just Woodbury Financial Services, the Oakdale, Minn.-based broker-dealer Advisor Group bought from the Hartford in 2012, took two years.
More broadly, one of the “clear negatives” of the network model is the “immediate tendency to a state of turmoil after the initial acquisition,” says Lori Hardwick, group president for advisor services at Envestnet.
“It usually takes a couple of years to streamline the integration process to economies of scale,” she says. “Employees don’t know where they will participate in the new company, and it causes paralysis unless you have a clear chain of command.”
For now, Cetera is concentrating on eliminating redundancies, says Roth, who brought in David Ballard — a 28-year veteran of AIG and its predecessor, ING Advisor Group — as Cetera’s chief operating officer this spring.
“You only need one finance group, legal group and tech budget,” Roth says. “Advisors can now open accounts and access client data more easily than they possibly could if all the firms were still separate.”
And technology advances and new software tools have streamlined the process, Roth maintains. “It’s not as difficult as people might like to think,” he says.
Ballard has been tasked with finalizing Cetera’s strategy to push organic growth. The network has started a loan program for advisors and says it is also investing heavily in technology, training, education and consulting services.
Both executives say their big priority is, as Roth puts it, “keeping current advisors happy.”
And Hardwick notes that Cetera has one key advantage. “There’s a massive amount of talent there,” she says. “They have an industry A-team. If anyone can pull it off, they can.”
As the networks have expanded, the frenzied deal-making has generated upheaval in the marketplace. The high prices paid by Cetera in its series of acquisitions appear to have scared off many other buyers — at least temporarily.
“We saw a significant increase in multiples paid for IBDs in the past two years,” says Mark Casady, CEO of No. 1 firm LPL.
While some of LPL’s competitors were aggressively expanding, multiples that had traditionally been six to eight times EBITDA or cash flow roughly doubled. Meanwhile, the old benchmark of paying 70% to 75% of revenue jumped to 100% or more.
Those high prices made acquisitions unattractive, says CEO Wayne Bloom of Commonwealth Financial Network, who says his own company is focused on organic growth. “At a certain point,” he says, “the economics just don’t work.”
Casady, too, says he doesn’t “see much activity” from LPL in the coming year. But he does note that some of that pricing pressure has eased more recently: “Now we are seeing a more reasonable price expectation from sellers in the market.”
The industry giant could be a “happy buyer” if multiples of EBITDA stay in single digits, he adds.
GROWTH OF SUPER-OSJs
Meanwhile, some of the action has shifted to the jumbo advisor teams known as super-OSJs — which offer another way for independent B-Ds to grow while retaining a layer of intimacy with their advisors.
In fact, the most recent acquisition announced by AIG Advisor Group — Royal Alliance’s deal for Bloomington, Ill.-based Affiliated Advisors Group, formerly known as First Midwest Securities — is a super-OSJ. And like many such offices, it’s a former standalone broker-dealer that sought the advantages of a larger operation.
Adding super-OSJs to the network is “a good template,” says Dmitry Goldin, Royal’s president and chief executive. “Regulation and costs are making it harder for smaller B-Ds to keep up, and the [super-OSJ] model allows them to stay in a culture they’re comfortable with. Their world isn’t turned upside down.”
In addition to oversight, compliance and supervisory services, many of these jumbo operations also provide back-office support functions and services such as practice management, consulting, succession planning and financing for mergers and acquisitions.
Such an operation can also offer more personalized attention to smaller advisors than they would get by dealing directly with a giant IBD, says William Hamm, CEO of Tampa, Fla.-based Independent Financial Partners — another one of LPL’s largest enterprise partners.
“We’ve made significant investments in compliance and implementing technology, systems and programs,” says Hamm, who works with around 500 advisors in 35 states. “Advisors also know their needs will be taken care of and they won’t get lost in a giant organization. They know LPL will listen to us and make changes if they have to.”
The clout of super-OSJs will continue to accelerate, predicts Bill Butterfield, research analyst for the Aite Group. But he believes the increasing reliance of IBDs on super-OSJs comes with a price.
“Super-OSJs are building scale, allowing smaller broker-dealers to maintain their culture and becoming large revenue producers,” Butterfield says. “But the downside for the IBD is that if they lose a super-OSJ, they lose a lot.”
That’s a particularly high-stakes gamble at a time when training programs and new advisors are scarce and the demand for high-quality producers far outstrips the supply.
For now, there seems to be a deal-making respite, with a number of top industry executives predicting fewer of the types of acquisitions seen in 2013-14. “There’s not much good stuff left,” the head of one large IBD says bluntly.
Raymond James Financial Services President Scott Curtis says he, too, doesn’t see many B-Ds that would be “a good fit” with his company.
Some of the networks may still be buying. AIG Advisor Group has no “immediate plans to grow from four to five” broker-dealers, McGinnis says, although the company is “leaving the door open” to smaller deals.
Lampen may be the marketplace’s X factor, however. One of the most active recent buyers, he doesn’t think he overpaid — citing EBITDA multiples for his deals in the “high single digits” — and says he will continue to be “open to new opportunities.” People know we’re here, they know what we’ve done and know that we have the strength and the capital to do more,” he says.
LPL will also be opportunistic, Casady notes. “We will look at the right opportunities if they arise,” he explains, adding, “We strongly believe in the industry model because it offers consumers objective financial advice and we see a very healthy market for independent broker-dealers continuing.”
No matter who buys what, executives are convinced that the IBD market is big enough for everyone to grow.
“We believe the IBD market is the most vibrant growth area in the financial securities industry,” Lampen says. “It’s a big ocean. There’s plenty of room for all of us.”
Charles Paikert is a senior editor of Financial Planning. Follow him on Twitter at @paikert.
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