Cetera skyrockets into first tier

Jul 7, 2013 @ 12:01 am

By Bruce Kelly

After an aggressive acquisition campaign, Cetera Financial Group Inc. is on the verge of reaching a milestone: $1 billion in annual -revenue.

It is a metric matched by only four other independent broker-dealers — and all the more noteworthy because Cetera achieved it after only three years of existence.

Some observers predict that Cetera will follow in the footsteps of LPL Financial LLC, the industry's largest player, with $3.6 billion in annual revenue last year. Like LPL, Cetera is backed by a private-equity firm and has grown quickly through acquisitions. Those same observers expect Cetera to seek some type of liquidity event, such as an initial public offering, as LPL did, or a sale of the company.

“I'm not privy to what they're thinking, but the strategy, with private equity behind it, is to go public or have a transformative transaction and merge with someone else,” said Richard Miles, managing director with Berkshire Capital Securities LLC, an investment bank that specializes in financial services mergers and acquisitions. “The game plan has to be to create scale to essentially replicate what LPL has been doing and take it public. That's the likely strategy for private-equity shareholders.”

However, the going may be getting tougher for Cetera. Despite strong growth, continued expansion will be more difficult because of two factors: an extremely difficult recruiting environment and a current dearth of quality large independent broker-dealers to buy.

Another question hangs over the fast-growing company: Can it avoid the back-office mistakes that tripped up LPL during its growth spurt and resulted in a series of investor complaints and regulatory fines?

Cetera was born out of the depths of the financial crisis. In 2010, private-equity firm Lightyear Capital LLC, controlled by former PaineWebber Group Inc. chief Donald Marron, acquired the independent-brokerage group owned by Dutch insurance giant ING Groep NV. The group comprised three broker-dealers, Financial Network Investment Corp., Multi-Financial Securities Corp. and PrimeVest Financial Services Inc., with a combined head count of 4,516 registered representatives and annual gross revenue of $653 million.

With the completion of the latest deal, Cetera's total revenue over the past three and a half years will have increased by more than 50%. And the firm clearly has benefited from the long-term trend that played a large part of its own inception: insurance companies running headlong from the notoriously thin-margined independent-broker-dealer business.


After spending more than a year tidying up its operations and getting brokers previously oriented to the insurance business to focus on investments, Cetera made its first grab of brokers at the end of 2011. While it was not an outright acquisition, Cetera announced an exclusive deal to recruit 290 reps and advisers from Pacific West Securities Inc., a broker-dealer that was shutting down due to thin margins and the high cost of doing business.

Six weeks later, in January 2012, Cetera announced it was paying $78.5 million to acquire insurer Genworth Financial Inc.'s independent broker-dealer, Genworth Financial Investment Services Inc., which produced $105.9 million in gross revenue the previous year with reps and advisers who focused on taxes and accounting.

This year, it agreed to acquire from MetLife Inc. two more broker-dealers, Walnut Street Securities Inc., with $110.8 million in gross revenue last year, and Tower Square Securities Inc., with $39 million.

Meanwhile, to create a better-focused business, Cetera finished re-branding each of its four broker-dealers under the common Cetera name: Cetera Advisor Network, Cetera Advisors, Cetera Financial Institutions and Cetera Financial Specialists.

It's also continuing to add top industry talent. Two weeks ago, Cetera said it was hiring Steve Dunlap, late of The Bank of New York Mellon Corp. and its Lockwood Advisors Inc. subsidiary, as executive vice president for wealth management. He will replace Barnaby Grist, who said in March he planned to leave for personal reasons.

Some executives and advisers will see a significant payday if Cetera becomes a public company. According to filings with the Securities and Exchange Commission by the individual broker-dealers, Cetera Financial Holdings Inc. has issued restricted-stock grants to some unnamed advisers and granted stock options to certain employees.

And the success of LPL Financial's IPO, which debuted at $30 per share in November 2010 and was trading at $38.38 per share last Wednesday, demonstrates Wall Street's appetite for independent broker-dealers and registered investment advisers, said Alex Kramm, an analyst with UBS Financial Services Inc. who covers LPL and other companies that provide services to brokers and advisers.

“Clearly, the market likes the independent broker/adviser theme,” he said. “I would think that the market would welcome more investible assets in that industry.”

“The shift to [independent brokers and advisers] is one of the best-documented themes in the financial services industry,” Mr. Kramm said. “Look at net new asset growth of Charles Schwab [& Co. Inc.]. Those are growth rates driven by the independent-adviser side of the business.”

Cetera executives stress that an IPO is not in the cards at the moment.

“There are no plans currently for a liquidity event,” chief executive Valerie Brown said.

One of the highest-ranking female executives in the financial services industry, Ms. Brown has headed Cetera since it was part of ING. Ms. Brown has an eclectic background, having earned an undergraduate degree in chemical engineering from Oregon State University and serving as a marketing executive with Taco Bell before joining ING in 1996. She also has an MBA from Stanford University.


Ms. Brown said her foremost priority is on Cetera's current roster of 6,342 advisers and assimilating about 860 more from Tower Square and Walnut Street. If the firm holds on to most of the brokers at those firms after the deal closes later this year, Cetera will reach the $1 billion revenue threshold.

The next priority is recruiting, then acquisitions. Ms. Brown said recruiting — currently in a trough across the industry as brokers enjoy an upswing in business from investors eager to be in the markets for the first time since the credit crisis— will pick up. And while significant midsize or large broker-dealers with more than $150 million or $200 million in revenue were hard to come by, plenty of smaller B-Ds are up for sale, she said.

She added that Cetera, despite its rapid growth, had the systems and policies in place to avoid the recent disciplinary issues which LPL Financial has had to deal with, including a $7.5 million fine from the Financial Industry Regulatory Authority Inc. to settle a host of e-mail system supervisory failures.

“We're very happy with where we are,” Ms. Brown said. “It's the right balance of building infrastructure and bringing in talent to support what we have and create growth.”

Ms. Brown and Cetera get high marks from one top broker, Larry Carroll, president of Carroll Financial Associates Inc., which has $1.36 billion in client assets. Mr. Carroll has been affiliated with Cetera and a predecessor firm since 1995.

“When ING owned the network, the culture was very controlled and bureaucratic,” he said. “It tended to be all about cost and budget.”

That has changed under Ms. Brown and Lightyear's leadership, Mr. Carroll said. For example, Cetera has built a comprehensive money management platform for advisers since Lightyear bought the enterprise.

“Now the emphasis is to be very strategic in terms of thinking what needs to be accomplished,” Mr. Carroll said. Management “spends time and effort to put those strategic initiatives into place. It's a very forward-looking manner” of running the firm, he said.


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