Consolidation in the independent broker-dealer universe has continued at an all-time high over the past few years, but the trigger points are not what they used to be.
Going back to 2008 to 2012, many broker-dealers were faced with simply trying to survive. Client arbitrations, rising compliance costs, problems with products and struggling markets made profitability at a lot of firms weak. Many firms were forced to either sell or face going out of business. The environment since the end of 2012 has changed dramatically.
Of the largest 75 independent broker-dealers that I follow, not one faced shrinking revenue in 2013. Broker-dealers are doing well. Even firms that struggle with recruiting new advisers are seeing organic growth push their gross revenue to pleasing numbers.
So why are we seeing so much consolidation? Temptation.
There has never been a time where multiples have been so high for broker-dealer owners to sell. Many of the recent acquisitions have closed anywhere between 45% to 89% of the gross dealer concessions produced by the firm. For example, a broker-dealer generating $75 million in gross dealer concessions annually may receive anywhere between $34 million to $67 million if they sell today. These high multiples are tempting many owners to cash out.
Four prominent midsize broker-dealers agreed to be acquired this year. WRP Investments Inc. entered into a deal with Sterne Agee Group Inc., KMS Financial Services Inc. sold to Ladenburg Thalmann Financial Services Inc., and both Girard Securities Inc. and VSR Financial Services went to RCS Capital Corp.
Prior to this recent acquisition frenzy, broker-dealers had been known to sell in the 25% to 45% range. In 2011, Securities America Inc. sold to Ladenburg Thalmann Financial Services Inc. for approximately 32% of their prior 12 months gross dealer concessions. In 2012, The Hartford Financial Services Group Inc. sold Woodbury Financial Services Inc. to American International Group Inc. for approximately 35% of their prior 12 months gross dealer concessions. Similar firms could expect to receive at least double that amount in today's environment.
How do these acquisitions affect advisers?
The No. 1 concern I hear from advisers is the stability of their broker-dealer. Many of them are looking over their shoulder wondering if their firm will be around tomorrow, and if their broker-dealer does sell, what will it mean to them. While some acquisitions result in changes that are ultimately good for advisers, others result in a complete upheaval to all the things that attracted the adviser to that broker-dealer to begin with.
Although there are many ways to structure these deals, the following are currently in vogue.
1) The broker-dealer is bought and rolled into an existing firm.
Under this scenario, we typically see a lot of change for advisers. The entire back-office may be consolidated, technology infrastructure may change and compensation may be altered. The overall business mix and culture of the new broker-dealer also likely will be different from what an adviser is used to. Usually, this type of acquisition happens fast, as sale announcements typically are made four to six weeks before the merger takes place. This has a tendency to leave advisers feeling rushed to do proper due diligence on the acquiring broker-dealer or any other broker-dealer they may be considering.
2) The broker dealer is bought and kept as a stand-alone.
This is usually less stressful for advisers. In this scenario, customer accounts do not move to a different broker-dealer, therefore advisers have more time to make a decision whether to stay or go. The main concerns for advisers when this happens are not necessarily changes that will affect them from Day 1, but the unforeseen changes down the road. Many advisers fear consolidation where the culture changes and the broker-dealer is no longer a fit.
With all of the changes of ownership in the independent broker-dealer space, it's hard to keep track of the landscape. Many advisers are feeling unsettled, and with the high price tags of recent transactions, it seems the trend of rapid consolidation is likely to continue. This leaves everyone wondering who will be next.
Jodie Papike is the executive vice president of Cross-Search, a third party, independent broker-dealer recruiting firm that connects advisers with the right broker-dealers.