2017 to be year of independent broker-dealer mergers

A looming fiduciary rule, combined with regulations limiting product sales, have experts predicting more consolidation is inevitable

Jan 22, 2017 @ 12:01 am

By Bruce Kelly

If past is prologue, 2017 should see a steady pace of independent broker-dealer consolidation and mergers and acquisitions.

Last year saw transactions involving firms that house thousands of registered reps and financial advisers as the industry scrambled to deal with the costly and burdensome preparation for the Department of Labor's fiduciary rule for clients' retirement accounts.

The deals in 2016 ranged from the biggest names in the industry to more modest firms. Giant companies like the insurer American International Group Inc., with 5,000 retail advisers at AIG Advisor Group, got out of the business, while a midsize, rep-owned firm with 220 advisers, Foothill Securities, was acquired by Securities America Inc., part of the Ladenburg Thalmann Financial Services Inc. network of firms.

The DOL fiduciary rule is scheduled to take effect in April but many in the financial advice industry hope a new Trump administration will delay or repeal the rule.

Regardless, industry executives and consultants believe more consolidation is coming. Independent brokers have seen margins compress steadily since the credit crisis as record low interest rates ate into their bottom lines. New regulations have hampered the sale of high commission products such as nontraded real estate investment trusts and variable annuities, increasing the pressure on firm finances.

(More: RIAs could be ultimate winners if DOL fiduciary rule is repealed or delayed)

Small firms simply cannot keep pace with the cost of investments in technology and staff the new rule requires. And even if the DOL fiduciary rule is repealed, many in the brokerage industry expect firms will operate under some sort of fiduciary standard, likely put forth by the Securities and Exchange Commission.


“This has been a significantly more challenging operating environment for wealth management firms,” said Richard Lampen, CEO of Ladenburg Thalmann. “And this has been one of the key contributing factors to smaller firms deciding that it is better for their advisers and employees to be part of a larger organization with the necessary scale and resources, including the intellectual and financial capital, along with technology, to adapt to the new regulatory and operating environment.”

“While the Trump administration may reduce some of this regulatory burden, to what degree is still unknown, we believe these underlying factors will continue to create the dynamic where scale matters greatly and further consolidation is inevitable,” he said. “For us increased consolidation is not a question of if, but of when and how much.”

The added expense of the Department of Labor fiduciary rule is the latest hurdle for firms since the 2008 credit crisis caused hundreds of broker-dealers of all stripes to close or find a partner with which to merge. Raymond James Financial Inc. said in October its expenses could increase by about $28 million during the company's 2017 fiscal year, in large part because of the DOL rule.

Number of broker-dealers has declined since 2011
Source: Finra statistics. *As of November.

According to Finra, there were 3,869 registered broker-dealers at the end of November, a 13.2% decrease from five years earlier, when there were 4,456 broker-dealers open for business. With the fiduciary rule hanging over the industry, 2016 was a busy year for mergers and acquisition.

In January, AIG said it was selling AIG Advisor Group to private-equity firm Lightyear Capital and Canadian pension manager PSP Investments. (The insurer's CEO, Peter Hancock, cited the DOL's fiduciary rule as part of AIG's decision to sell its broker-dealer unit.)

(More: Sale of AIG Advisor Group may signal wave of mergers ahead)

At the end of February, MetLife Inc. said it was selling its U.S. adviser unit to Massachusetts Mutual Life Insurance Co.


NFP Corp., a leading insurance broker and consultant, said in April it was selling a majority stake in its independent broker-dealer, NFP Advisor Services, to funds managed by private-equity shop Stone Point Capital. NFP Advisor Services changed its name to Kestra Financial.

National Holdings Corp. said at the end of April that it had reached an agreement to be acquired by Fortress Biotech Inc., a company that develops novel pharmaceutical and biotechnology products. National Holdings was the parent of two independent broker-dealers, National Securities Corp. and vFinance Investments Inc.

Delaying the DOL would only provide a reprieve, but you can't put the genie back into the bottle, I still think it's going to drive consolidation.—Dennis Gallant, president of GDC Research

And late last year, Investors Capital Corp. and VSR Financial, two broker-dealers in the Cetera Financial Group network, were merged into sister firms as part of Cetera's broader consolidation and restructuring after the bankruptcy of its former parent, the defunct RCS Capital Corp.

“Delaying the DOL would only provide a reprieve, but you can't put the genie back into the bottle,” said Dennis Gallant, an industry consultant and president of GDC Research. “I still think it's going to drive consolidation.”

(More: Cetera's parent company appoints three new board members, including former head of eMoney Advisor)

Firms that have established brands and scale have the advantage right now, he said, pointing to recent successes in recruiting at LPL Financial and Raymond James as indications of reps' desire and movement to stability. “It's an indication of the thinking of reps that have five or 10 years to go until retirement,” he said. “Stable firms have that advantage.”


And large IBDs realize they have the upper hand and are moving quickly to benefit. Just last week, Advisor Group said it hired the former president and CEO of Foothill Securities, Steve Chipman, to be senior vice president of strategic acquisition. In this role, Mr. Chipman will work with Advisor Group CEO Jamie Price, along with the heads of the broker-dealers in the network, and lead the strategic planning process for broker-dealer acquisitions.

Foothill Securities' Chipman: How can advisers stand out?

And Advisor Group this month also said it has made broad changes to its investment platform for its 5,000 advisers, including simplifying and reducing fees on its advisory and brokerage platform.

“We had our existing adviser in mind, of course, but we were also thinking about the opportunity to other firms who may want to join us,” Valerie Brown, Advisor Group's executive chairman, said of the new platform. “Our goal is to help our advisers to compete effectively, and also be attractive to other firms who want to move to a platform with more scale. We absolutely had in mind participating in the coming consolidation with this new platform.”

(More: Valerie Brown: 2016 InvestmentNews Women to Watch)

James Poer, CEO of Kestra Financial, said his firm is looking for potential deals.

James Poer, CEO of Kestra Financial

“We are actively looking for opportunities and we definitely are an interested acquirer,” said Mr. Poer. “We certainly have access to capital and are pursuing two paths.”

The first focuses on institutions such as IBDs and RIAs, he said. “Not a week goes by and I don't look at one,” he said. “The vast majority don't make money so there's nothing really to sell,” he said, adding such firms are typically small and full of advisers with compliance marks on their employment histories.

The second part of Kestra's strategy focuses on acquiring individual practices from advisers, said Mr. Poer. “There seems to be a steadier pace of retail opportunities that are a fit for what we are trying to achieve, but I also expect strong institutional opportunities in the future.”

Small broker-dealers in particular are feeling pain, executives said.


“We are seeing some interest in much smaller independent broker-dealers about just shutting down and moving on to become what is sometimes called an OSJ, or an office within LPL,” said Mark Casady, the former CEO of LPL Financial, on a call with analysts in November. Mr. Casady retired at the start of the month.

“We see more of that, and we do see what I would describe as some small scale M&A potentially coming up as well,” he said. “So I don't want to overpromise here, but I do think we're starting to see, again, some forces align as smaller brokerage firms just recognize there is a lot to invest in. The cost of investing in DOL is about the same for all of us, and in our case it's spread over a significant business. In other cases, it's over a fairly small business. So that's what will lead to M&A, in our view.”

Meanwhile, John Rooney, managing principal at Commonwealth Financial Network, believes that if the new administration delays or repeals the DOL rule, a reprieve could goose some smaller firms to sell.

“If the DOL is off the table, you might see small broker-dealers take advantage of the new window they might have to monetize their asset base before the SEC's version of a fiduciary rule arrives,” he said.

(Watch: The DOL fiduciary rule's big lingering questions)


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