For small B-Ds, becoming part of a branch office of a larger firm is a viable exit strategy

Such deals allow them to get out from under the cost of running a broker-dealer, but preserves their brand and culture

Aug 25, 2017 @ 1:18 pm

By Bruce Kelly

LPL Financial's acquisition this month of the National Planning Holdings Inc. network of four broker-dealers with 3,200 reps and advisers certainly has the independent broker-dealer industry abuzz, but transactions involving smaller broker-dealers are also of keen interest, as well as far more common.

At the start of the year, brokerage executives pointed to the potential for large firms buying small firms, which are struggling with compliance and technology costs, and absorbing them as branches called offices of supervisory jurisdiction, or OSJs.

Two recent deals or mergers stand out.

Royal Securities Co. of Grandville, Mich., a 17-person broker-dealer managing $1.1 billion in assets, in July said it was affiliating with VantagePointe Financial Group, a member of the John Hancock Financial Network. The firm will remain in its current location and operate as Royal Advisors. VantagePointe, of Grand Rapids, Mich., will act as its Super OSJ.

And Girard Securities, which has 200 advisers and is owned by Cetera Financial Group, this month said it was shutting down brokerage operations and being absorbed by a sister firm, Cetera Advisor Networks, but keeping its brand and becoming its own independent branch.

Cetera Advisor Networks focuses on supporting teams of advisers in more than 70 branches, or OSJs.

Formerly called Financial Network Investment Corp., Cetera Advisor Networks has a history of working with firms like Girard, noted Robert Moore, CEO of Cetera Financial Group.

"These firms can wind down those parts of the enterprise and essentially get out from under the cost of running a broker-dealer and all that it comes with, but preserve the brand and culture," Mr. Moore said. "They get our scale, access to talent and technology that would be difficult if not impossible for them to replicate."

"And these regional directors are direct participants in our business," he said. "They are actually engaged in setting priorities. They're not just treated like a big customer."

Mr. Moore declined to say how many potential small firm acquisitions Cetera currently has in the works.

"Larger firms are viewing that model as a great way to grow their businesses and a great solution for small BDs," said Larry Roth, the former CEO of AIG Advisor Group and Cetera Financial Group. "I expect to see a lot more of that. Girard becoming a large branch at Cetera Advisor Networks makes sense."

"It's a good thing for the industry," Mr. Roth said. "It gives advisers and clients access to larger firms, which have access to capital and technology, and have a future. It takes pressure off advisers who need to be somewhere stable."

Jim Nagenagast, CEO of Securities America Inc., the largest broker-dealer in the Ladenburg Thalmann Financial Services Inc. network, said his firm has done these types of deals in the past and is looking forward to doing more in the future.

"We're optimistic to do these deals," he said. "We have proven experience in doing these deals and knowing how to construct them and proven ability to close such deals. We know how to navigate Finra approval, the 1017 process, and we've retained more than 90% of the advisers. We've moved data of hundreds of advisers and thousands of accounts."

The target broker-dealer to turn into a branch has over 10 advisers with average production of $200,000 annually in revenue, or at least $2 million for the branch, Mr. Nagengast said.

Securities America has completed six deals in five years, he said, adding that five were asset purchases and one a recruiting referral and all became super OSJs.

Mr. Nagengast said that, due to the recent request to delay the Department of Labor's rule, there may be some slowdown in consolidation but the long-term trend will continue.

Eric Schwartz, executive chairman of the board at Cambridge Investment Research Inc., said that Cambridge had about a dozen calls from small firms around the start of 2016, before the fiduciary rule was finalized. Such interest has slowed down, but now that parts of the rule are in place, small firms may start looking for a partner again.

"We did one small deal and it became an OSJ," he said. "It was complicated but it worked out. The others, some didn't sell at all because of an unrealistic view of the firm's worth and others were sold. In general, I don't think we will be a major player to buy small firms and turn them into OSJs. We prefer to recruit reps who want to come to us."

Regardless, the tide has most likely turned for smaller firms, said Jonathan Henschen, an industry recruiter,

"Advisers are afraid to join smaller broker-dealers because regulation is going against them," said Mr. Henschen. "And those firms that have less than $20 million in annual revenue are particularly having a hard time and vulnerable. The owners are realizing that profitability has peaked. They could sell now and have a larger firm do the back office work and simply become a producer group."

Management could get a 95% payout, give advisers 90% and then invest the difference of 5% to pay for administrative work such as trouble shooting, marketing and dealing with individual broker problems with the larger firm's back office.

"There are even one man broker-dealers that are trying to hold out," Mr. Henschen said. "There are tons of those out there."


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