Advisor Group still facing hurdles on debt: Fitch Ratings

Advisor Group, a leading network of independent broker-dealers, is juggling both obstacles and advantages in the marketplace, and that means its debt is being closely watched, according to a report last month from the rating agency Fitch Ratings Inc.

On one hand, Advisor Group has a business model that generates cash, a relatively flexible cost base, which could help cushion revenue declines in the current environment, and attractive retention rates of financial advisers, according to Fitch, which issued the report November 10 and left its ratings for Advisor Group's bond unchanged at B-, or junk. Fitch also maintained a ratings outlook of "negative" for the bonds.

On the other, the broker-dealer network faces risks of integration of broker-dealer back office functions, hitting profitability levels, and reducing debt, Fitch noted, particularly after its acquisition earlier this year of Ladenburg Thalmann Financial Services Inc.

Like Cetera Financial Group, Advisor Group is owned primarily by private equity funds. Such funds typically use high levels of debt to complete their purchases, and that debt concerns some in the marketplace now that broker-dealers face a low interest rate environment. 

The combination earlier this year of the two broker-dealer networks created a giant firm with more than $450 billion in assets under management, $3 billion in annual revenues and nearly 11,500 advisers.

Low interest rates hurt broker-dealers because they generate income from clients' cash deposits, and this year's decline in rates back to near zero could be particularly painful for broker-dealers, like Advisor Group, that issued debt to complete acquisitions.

"The continuing negative outlook reflects Fitch's view that the challenging economic environment, including lower for longer interest rates, may prevent Advisor Group from achieving projected profitability levels over the next 12 to 18 months, resulting in higher leverage and weaker interest coverage for an extended period," according to the note.

"The negative outlook also reflects uncertainties surrounding Advisor Group's ability to achieve planned cost reductions associated with the acquisition of Ladenburg and the extent to which realized synergies would be sufficient to drive deleveraging," Fitch noted.

Advisor Group in May told financial advisers it was going to shut down three of the Ladenburg firms and consolidate or move those advisers onto the platform of Securities America Inc., the largest broker-dealer that was part of Ladenburg.

“We are extremely comfortable with our capital structure and pleased that Fitch has affirmed our current credit ratings," wrote Advisor Group CEO Jamie Price in an email. "In addition, the integration of the Ladenburg Thalmann acquisition has exceeded our advisor retention and financial expectations."

One observer noted that the network could be facing difficulties with its debt.

"With the recent mergers and closing of three back offices, cost cutting has now been largely played out with the Advisor Group broker-dealers already running lean on staffing with the shared services model," said Jon Henschen, an industry recruiter.