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BD consolidator to buy 180-advisor firm as smaller players look for partners

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A strategic acquirer specializing in independent broker-dealers is buying the 180-advisor firm World Equity Group, roughly a year after its first two purchases in the space.

Wentworth Management Services, the parent firm of IBDs Purshe Kaplan Sterling Investments and Cabot Lodge Securities, will allow the Chicago-area World Equity to operate as an independent subsidiary under co-founder Rich Babjak. The holding company announced the deal on Dec. 7.

The parties did not disclose the terms of the acquisition, which is expected to close upon receiving approval from FINRA. A New Jersey-based family office and a special-purpose vehicle fund are the two members of Wentworth, whose announcement says it serves as a ”long-term owner and operating partner for broker-dealers and RIA firms."

Wentworth also says expressly that it is not a private equity fund, though such buyers have been ramping up the M&A deals across wealth management in recent years. Consulting firm Echelon Partners predicts transactions to increase 9% in 2018 to 183 deals for the sixth straight record year.

Wentworth expects to make three to five more acquisitions next year as it seeks to "bring scale and succession planning to owner-operators" in the IBD space, according to CEO Ryan Morfin. World Equity principal owners Rich Babjak and Robert Yarosz — who are both also advisors — opted to sell to Wentworth ahead of Yarosz's impending retirement, Babjak says.

“I really still wanted to be part of something going forward, not only as a financial advisor, but to really have some input into the direction. I also really wanted to keep my team intact,” Babjak says. “A lot of the money that’s out there doing something like this is really that private equity money that’s looking to flip and not be in this for the long haul."

The selling firm generated roughly $40 million in revenue in 2017, placing it outside the top 50 IBDs on Financial Planning's annual FP50 survey but among several established players. Regulatory, compliance, technology, cybersecurity and other burdens are putting pressure on small and midsize IBDs, Morfin says.

“We think that achieving scale is something that every board of directors or shareholder group should be considering,” he says. “We think there will be tremendous consolidation going on in the next five years for this space.”

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World Equity and a separately managed account program it sponsors, Compass Asset Management, have $701 million in assets under management, according to its latest SEC Form ADV. Pershing and RBC Capital Markets act as the 25-year-old company’s clearing firms, FINRA BrokerCheck shows.

The selling firm manages $4 billion in direct client assets and $10 billion to $15 billion in non-custodied institutional assets, according to Babjak. It also has custodial agreements with Pershing, RBC and TD Ameritrade, the ADV says.

In addition to wealth management, World Equity offers an in-house bond desk, investment banking, alternative products and pre-IPO funds, among other areas. The firm’s website refers to its representatives as high-net-worth financial experts.

World Equity’s deal with Wentworth presents an alternate path to other IBDs recently changing hands. Advisor Group’s network has made three deals this year, which will result in the three firms’ advisors folding into the acquiring firm rather than remaining independent subsidiary firms. Cambridge Investment Research purchased Broker Dealer Financial Services in October and absorbed the seller into its structure.

The growing consolidation, therefore, has led to fewer IBDs. The total number of IBDs has fallen by more than a quarter over the past decade, to 847 firms, according to Echelon, which also reported earlier this year that the sector’s margins have shrunk by 8 percentage points to 3% over that span.

More regulatory requirements, fee compression and a number of other factors are posing questions for small and midsize IBDs, Babjak says. Their ranks have even been dropping amid positive equity markets, he says, leading to the question of how many more could vanish in a bear market.

"It’s really all about scale," Babjak says. "I had to look a lot deeper than just getting liquidity for the shareholder. It’s about thriving and surviving the next five years."

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