Glut of IBDs for sale creating a buyer's market, putting pressure on prices

Sellers may not get prices they expect

Nov 25, 2015 @ 12:20 pm

By Bruce Kelly

A glut of firms for sale is creating a buyer's market for independent broker-dealers that could put pressure on the prices sellers are able to attract.

Firms for sale include Cetera Financial Group, AIG Adviser Group and Next Financial Group, which collectively represent 15 individual broker-dealers and more than 15,000 registered representatives and advisers.

“There is a higher number of potential opportunities than we have ever seen before,” said Richard Lampen, president and chief executive of Ladenburg Thalmann Financial Services, which has completed five broker-dealer acquisitions since 2007. “The $64,000 question is, how many deals are going to get done?”

“With so many potential sellers in the market, and rumors of more sellers, I'm curious to see how the market-clearing process will work,” Mr. Lampen said. “There are some willing buyers, but is there a price that's going to work?”

Mr. Lampen said sellers are going to have a reality check when it comes to offers their properties are likely to attract. He said the industry has put behind it the outsized valuations of independent broker-dealers used in acquisitions by RCS Capital Corp., a brokerage holding company that one-time real estate mogul Nicholas Schorsch put together in a flurry of acquisitions between 2013 and 2014.

“Some sellers still think it's 2014, and Nick Schorsch price expectations are out there,” Mr. Lampen said. “But it's hard to imagine any one overpaying at this stage in the process.”

CETERA TOPS THE LIST

The largest of the firms reportedly in play is Cetera Financial Group, the network that Mr. Schorsch put together. It is made up of 10 broker-dealers with about 9,500 reps and advisers. Larry Roth, the CEO of Cetera and its parent company, RCS Capital, told advisers on a conference call recently that a half dozen companies had shown interest in the firm and that a new owner or significant private-equity investor would be in place by year-end.

AIG Advisor Group is made up of four firms with 4,925 producing registered reps and advisers.

The brokerage network is part of a “strategic review” its parent company, American International Group Inc., is undertaking, according to Kevin Dinino, a company spokesman. He said the company has received “several inquiries regarding the Advisor Group.”

In a memo to its advisers, Peter Harbeck, chairman of the Advisor Group, and Erica McGinnis, its CEO, wrote: “We are writing to let you know that we are evaluating these inquiries. All interested parties have a favorable view of our growth prospects, are committed to the independent broker-dealer industry and are not among our competitors.”

Activist investor Carl Icahn has been pressuring AIG to unlock shareholder value. According to Bloomberg News, Mr. Icahn told AIG CEO Peter Hancock in a letter that AIG should split into three companies to escape the restrictions imposed on the largest financial firms. One company would focus on life insurance, the second on property-casualty coverage and the third on mortgage guaranties.

Rounding out the firms for sale is Next Financial Group Inc., with close to 740 reps and advisers.

ONE STARTLING DEAL

While Mr. Lampen says the days of over-the-rainbow asking prices for independent broker-dealers are over, at least one transaction this year startled the industry with its price tag.

In the largest independent broker-dealer acquisition of the year, H.D. Vest Financial Services Inc. said in October it was being acquired by Blucora Inc., a company that focuses on Internet businesses, for $580 million. H.D. Vest has close to 4,500 registered reps and financial advisers who are primarily tax professionals and accountants. Those advisers manage more than $36 billion in client assets.

H.D. Vest's price tag represented a significant premium. The firm produced $304.8 million in total revenue in 2014, according to the most recent survey of independent broker-dealers by InvestmentNews. That means Blucora is paying almost twice H.D. Vest's top line.

IBDs have traditionally been valued at 30% to 60% of a firm's annual revenue.

Mr. Lampen said the big price was due, in part, to the synergies that Blucora could find by combining its Internet tax business with H.D. Vest. “Blucora paid a full price but had the financial wherewithal to do so,” he said.

While potential buyers and sellers wrangle over asking prices for independent broker-dealers, advisers sit and worry, said Jodie Papike, executive vice-president of Cross-Search, a recruiting firm for independent reps and employees at such firms.

“For advisers, it's an unsettling time,” said Ms. Papike. “Even at stable firms, the advisers are looking over their shoulders and wondering if a target is on their backs. And the advisers at the firms up for sale are wondering what to do.”

“Three years ago, advisers would barely mention the parent company of a broker-dealer they wanted to move to,” Ms. Papike said. “Now, it's one of the first things in a conversation, and they want to know about the long-term stability of the firm. They're asking, who's the owner and will that cause me pain in the future?”

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