A S F. SCOTT FITZGERALD once wrote, there are no second acts in American lives. Well, Mr. Fitzgerald didn't have the securities industry in mind.
In fact, brokerage firms are filled with stories of second and third, and even fourth, attempts of brokers and executives striving to grab the brass ring.
But it's the broker-dealer owners — the builders and sellers of firms — who perhaps run the greatest risk when they re-emerge in the securities industry. After selling one broker-dealer, preferably for a bundle to a large bank or insurance company, those business owners typically sit on the sidelines for a couple of years before jumping back into the fray.
Such executives have plenty at stake. Not only are they likely to invest some of the capital they earned from selling their first broker-dealer into their second, they depend upon hard-won loyalties to open the new business. In their wakes follow staff members, managers, representatives and advisers — people who used to work for them and want to come back to see if the second go-round will be as good as the first.
In some cases, those second acts go off without a hitch. Others, however, flop, perhaps proving Mr. Fitzgerald's point all along.
The willingness for an owner and senior management to change to fit the times is essential to the second endeavor's success, said one chief executive and two-time firm owner.
“The reason why some people come back into the business and fail? They think they're just going to get back on the bike and ride again,” said Marshall Leeds, owner and chief executive Summit Brokerage Services Inc. “I don't think you're going to do the same thing you did in the "80s and be successful.”
Mr. Leeds' words should be heeded by broker-dealer owners looking to cash out and make a second splash. In 1999, he sold JW Genesis Financial Group Inc., an independent broker-dealer, and its clearing operations, to First Union Bank for $170 million. After several mergers, that broker-dealer is now Wells Fargo Advisors Financial Network, one of the steadiest-growing independent broker-dealers in the market. It reported $434.2 million in total revenue in 2010.
Mr. Leeds bought Summit in 2002 but waited four years before beginning to build the firm and recruiting.
The building has gone well, he said. Summit Brokerage has about 340 reps and advisers who average about $200,000 each in fees and commissions. In 2010, the firm reported $62.5 million in total revenue.
“The second time around, it's a lot more fun and a lot easier,” said Mr. Leeds, 56. “You actually know what you're doing. The first time, you try a lot of new things and fail. The next time, you try fewer things and succeed.”
Learning from your business experience, rather than simply trying to replicate a previous firm, is crucial to the success of a broker-dealer owner making a second run, one industry observer said.
“I think Marshall has really matured as an executive,” said Larry Papike, who owned a broker-dealer in the 1980s and 1990s and brokered the sales of several others before opening a recruiting firm, Cross-Search. “He's very cautious as to [the] advisers he brings on, and he's very cautious on products,” said Mr. Papike, who has recruited for Summit.
Mr. Leeds “is not looking to make the big score every day; he's looking for slow, steady growth,” Mr. Papike said. “That's the opposite of the way we used to do it in the old days.”
Some second acts fail.
Stephen Wild sold Securities America Inc., in 1998 to American Express Financial Advisors, now Ameriprise Financial Inc., for an undisclosed amount. A few years later, Mr. Wild launched another independent B-D, QA3 Financial Corp.
The firm looked to be a surefire success, and Mr. Wild built it up to more than 400 independent reps by the end of 2010. But the entire enterprise diminished in the span of a few months as the firm, like dozens of other independent B-Ds, was crushed under the costs of litigation stemming from private placements that failed during the credit crisis.
QA3, like Securities America, was a big seller of two series of private placements, Medical Capital Holdings Inc. notes and preferred stock of Provident Royalties LLC, both of which the Securities and Exchange Commission have charged were fraudulent.
In February 2011, QA3 abruptly told its brokers the firm was going to close and that the reps and advisers had a week to find a new employer.
With so much at risk, broker-dealer owners in their second endeavor need to be more cautious with advisers and products than with their first, one executive said.
“The first thing is, you always want to do quality business,” said Scott Sherwood, part owner of Calton & Associates Inc.
Mr. Sherwood owned 15% of Investacorp Inc. before it was sold in 2007 to Ladenburg Thalmann Financial Services Inc. He now controls 20% of Calton, which has 200 reps and is looking to build, but will do so carefully, he said. “You never want to compromise for growth. Don't cut corners. Don't stretch to get business that you don't completely believe in.”
Meanwhile, Mr. Leeds does not anticipate a third act.
But advisers affiliated with Summit Brokerage, such as Mr. Leeds, are also stakeholders. At some point, if they receive an offer to buy the firm, Mr. Leeds' plans could change.
“If the advisers want to sell the firm, we'll sell the firm,” he said. “I never say we'll never sell the firm. It might happen, but that's not in the business plan.”