On Advice

LPL video about private equity looks like a swipe at Cetera

Recruiting video warns about potential consequences for advisers when a PE firm buys a broker-dealer

Sep 21, 2018 @ 10:35 am

By Bruce Kelly

LPL Financial appears to be dissing its rivals, including Cetera Financial Group, in a video that is making the rounds of social media sites such as LinkedIn with the title, "How Financial Advisers Can Be Impacted by Private Equity Ownership."

LPL, which formerly was owned by private-equity firms, is now oddly warning of the dire consequences for financial advisers if their broker-dealer is bought by such investors.

The timing of LPL's video, which is almost four minutes long and makes no direct mention of Cetera or other firms, is curious.

While private-equity manager have bought a variety of broker-dealer over the years, Cetera Financial Group, a network of six independent broker-dealers with about 8,000 brokers and advisers, is the latest to be acquired. Cetera said in July that private-equity firm Genstar Capital would buy a majority equity stake in the company. The deal is supposed to close by the end of the month.

Private-equity ownership of a broker-dealer may have some benefits, according to the LPL video, which is clearly aimed at recruits. But if a private equity firm's "main goal is short-term profit, with plans to divest themselves within three to five years, this could pose significant challenges, disruptions to the business, and uncertainty for the financial advisers they support," intones the narrator as various black-and-white illustrations are drawn on a whiteboard.

The video focuses on three points, noted industry recruiter Jon Henschen: short-term ownership, the burden of high interest payments on debt, and cuts in support to advisers.

"The PE story is mixed, with some great successes, like LPL going public," Mr. Henschen said.

"But there were also outcomes using leverage that worked against advisers' best interests," he said, pointing to the amount of debt that Cetera's former owner, RCS Capital Corp., took on to buy the firm in 2014. Unable to pay that debt, RCAP slid into bankruptcy in early 2016. Its stockholders were wiped out, and the firm was left heavily in debt.

To be clear, RCAP was a broker-dealer holding company, not a private equity firm. However, RCAP used unsustainable amounts of debt to fuel its acquisition binge.

A spokesman for LPL, Jeff Mochal, did not return a call to comment.

"We strongly agree with the message that private equity ownership brings significant benefits, as is the case with our PE ownership model, which enables us to focus on the best interests of our advisers and their clients, rather than appease the short term needs of Wall Street equity analysts," Cetera spokesman Joseph Kuo wrote in an email.

The rivalry between LPL and Cetera is well-known. Cetera CEO's is Robert Moore, a former president of LPL who left the company in 2015 after he was passed over for the CEO's job. Mr. Moore scored a high-profile win against his old firm in early 2017 when star broker Ron Carson left LPL for Cetera.

LPL's current CEO, Dan Arnold, succeeded Mr. Moore as president and moved into the top spot last year after Mark Casady retired.

LPL has a long history with private equity. Two private-equity firms bought a majority stake in LPL in 2005. After bulking up with a string of acquisitions, LPL listed its shares on Nasdaq in 2010, giving its longtime executives and advisers the opportunity to sell shares and reap riches. The private-equity owners have since sold the overwhelming portion of their LPL shares.

LPL doesn't talk about its successful private-equity exit in the video. Indeed, the video fails to make any mention of LPL's history with private-equity owners.

"A private-equity firm that is focused on an exit will likely look to cut costs," according to the video. "A private-equity firm looking forward to an exit may attempt to consolidate broker-dealer operations and cut back-office support, or seek to acquire more advisers quickly but without expanding support staff."

Overall the video, which was shared privately with InvestmentNews and was not available to be posted, sounds pretty grim.

The LPL employees and executives who made millions after selling their stock when the company was listed, in large part due to the efforts of private-equity investors, might want to argue otherwise.

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