Independent-contractor broker-dealers are known for using lots of packaged products. But a handful of firms also offer access to corporate-finance services, including investment banking, which they think gives them an advantage over their competitors.
“We think the value proposition is in running a retail platform with totally open architecture, asset management, managed futures, insurance — and a corporate-finance department at the same time,” said Mark Goldwasser, chief executive of National Holdings Corp., parent of independent-contractor firm National Securities Corp., which has nearly 600 advisers.
Last year, the firm participated in 38 underwritings, focusing on real estate investment trusts, business development companies and master limited partnerships.
National Holdings Corp.'s retail revenue was about $80 million in its fiscal year ended September, out of $119 million total. Investment banking brought in about $15 million but is growing quickly.
“There's a natural harmony between investment banking and retail,” Mr. Goldwasser said. “Because we have a unique [retail-distribution] channel, we get invited to come into some of the best” offerings.
“More and more, we see retail [advisers] being able to participate” in offerings, said Jay Carter, chief executive of Sterne Agee Financial Services Inc., which has about 280 independent advisers. Most of the deals are secondary offerings, he said.
Sterne Agee can advise on mergers and acquisitions of $50 million or more if they fit with the firm's expertise in financial services, industrials and energy, said Joseph Zabik, head of investment banking.
“Our focus has been on advisory work, for mergers and acquisition, [and] we do get a lot of inbound opportunities from our broker force,” he said, including referrals from Sterne Agee's independent representatives.
A big benefit to Raymond James Financial Services Inc.'s 3,000 independent contractors is the firm's ability to act as an adviser in mergers and acquisitions as small as $30 million, said Kerri Edwards, vice president of investment banking. The firm can help with transactions as small as $5 million through referral networks to outside boutique partners that Raymond James began building four years ago.
Since 2011, the firm has been involved with 138 buy- or sell-side transactions as an adviser on deals worth $6.9 billion.
“The [retail] client's small business is often their most valuable asset,” and M&A work can build a relationship and liquefy the asset, Ms. Edwards said.
In one such transaction that closed in June, Raymond James advised a company called finalsite, which provides web software and services for schools. It was sold to a private-equity group for an undisclosed sum.
The deal grew out of a discussion between Raymond James Financial Services adviser Eliot Weissberg and his accountant. With the deal now done, finalsite's founder is considering how to handle the proceeds. When the time comes to make those decisions, “we'll be at the table,” said Mr. Weissberg, who also earned a referral fee from the deal.
“It was a nice bonus,” he said. “I'm a traditional financial planner, [and] I run across a lot of different needs that people have. The more [needs] you can fulfill, the better the relationship.”
Some 8-million-plus baby boom-ers own businesses and will be looking to sell in the next five to 15 years, making business sales a potentially lucrative niche, Ms. Edwards said.
In a flurry of activity over the past three months, as owners rushed to beat changes in the capital gains tax rate, Raymond James closed three other adviser-referred deals, creating $150 million in liquidity, she said. “That is prospective assets under management, so you can see the synergies.”
On the syndicate side, retail distribution is a big advantage, Ms. Edwards said. “We're not placing [issues] into hedge funds, so there's a good holding period” for stocks the firm underwrites. Raymond James does a lot of work in REITs, MLPs and royalty trusts, which tend to be retail products.
Nevertheless, corporate finance likely will remain a niche within the independent B-D market.
Most advisers are doing financial planning and fee-based business, and new issues and business transactions don't fit into that model. Furthermore, corporate finance is not a steady source of revenue, and many advisers wish to avoid any of the banking conflicts that embarrassed wirehouse firms and culminated in a $1.4 billion settlement with regulators in 2003.
Independent firms involved in corporate finance stress that it is just one in a broad menu of services.
“I don't hang my hat on [investment banking] at the independent level,” Mr. Carter said. “Only about 10% [of our advisers] use syndicate offerings with about 10% of their clients.”
According to Ms. Edwards, the number of companies referred by advisers for banking and advisory services [public deals] “still makes up only 5% to 10% at most of the total revenue that investment banking is generating.”
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