Expect giant branch offices at IBDs to flex their muscle

We’re not saying we’re in the same league as, say, Nostradamus when it comes to predicting the future, but the team at InvestmentNews has a pretty good idea of what advisors should be on the lookout for in 2023.

All hail the Super OSJ!

Large offices of financial advisors registered with independent broker-dealers will continue to gain authority and power in 2023 in the financial advice industry, as the push and pull between the brokerage firms where those advisors are housed and private equity buyers chasing wealth management firms with buyout riches continues.

2022 saw a significant development in the consolidation of the wealth management industry: Independent broker-dealers began competing with private equity-backed aggregators of registered investment advisors to purchase or invest in giant offices of advisors, with several IBDs making investments in giant branch offices of advisors already registered with the firm.

This change signaled the strength that is getting flexed by giant branch offices, commonly referred to as Super OSJs — shorthand for offices of supervisory jurisdiction — in the industry. Independent broker-dealers like LPL Financial, Advisor Group and Cetera Financial Group rely on these giant branches for production and revenue.

Private equity managers this year will continue to chase the owners of those branch offices, which can oversee up to hundreds of advisors who annually generate billions of dollars in revenue. And this is despite the backdrop of rising interest rates and a potential recession, typically hurdles for the private equity market. Borrowing is harder to arrange today than a year ago. Private equity firms during a period of rising interest rates tend to go slower with deal-making.

But that’s likely not to be the case in 2023. According to industry sources, the large private equity managers that have invested in the independent broker-dealer industry are in the third or fourth year of holding onto those investments. They likely don’t want to hang onto these firms beyond seven years, the typical exit time for PE managers in such deals.

In other words, private equity managers that own independent broker-dealer networks think Reverence Capital Partners, owner of the giant Advisor Group brokerage network, will spend 2023 trying to build scale despite increased financing costs. It is potentially targeting 2025 to exit via the public markets and an initial public offering. Or it could sell to a larger strategic buyer, including an even larger private equity firm.

And the wider private equity market regards the wealth management or financial advice industry as underinvested, even compared to five years ago, when PE managers jumped into the industry and began investing broadly.

That means there are plenty of private equity managers left who could still lavish cash on large branch offices of independent broker-dealers.

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