The broker-dealer network Osaic Holdings Inc. boosted an all-important profitability measure over the first half of the year by almost one-third, according to a recent analysis of the privately held firm.
Osaic posted an EBITDA — earnings before interest, taxes, depreciation and amortization — margin of 14.6% as of midyear on a trailing 12-month basis, which compares to its average EBITDA margin of 11% from 2019 to 2022, according to Fitch Ratings.
The substantial boost in Osaic’s EBITDA, a key cash flow metric for measuring the valuations of registered investment advisors and broker-dealers, comes as the brokerage industry in general is benefiting from higher interest rates.
Since January 2022, the fed funds rate has risen from essentially zero to 5%. This means broker-dealers are profiting from cash held in client accounts, margin loans used to buy more securities and banking activity in general.
“Osaic’s net interest income — NII — on cash balances held in sweep accounts improved year-over-year due to the higher rate environment, which has partially offset lower commission-based revenues and revenues linked to market performance,” according to the Fitch report from October.
Fitch Ratings affirmed Osaic Holdings Inc.’s long-term issuer default rating for the company’s debt at B, or “highly speculative.” Such a rating indicates that a company’s “financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment,” according to Fitch.
Perhaps more importantly, the rising EBITDA margin demonstrates that Osaic, which many in the market believe will seek to go public in the next few years, is moving its cash flow in the right direction. In the wake of the financial crisis, broker-dealers like those that comprise Osaic were stuck generating single-digit returns as the Fed cut interest rates to zero and technology costs soared.
“I think that Osaic really recognizes that it takes a lot of capital deployed properly to support financial advisors and their success,” said Rita Robbins, founder and president of Affiliated Advisors, which is registered with Osaic. “Osaic is putting resources where advisors can grow. It’s had a great recruiting year and hired the right people. Management understands the market and what they need to succeed.”
“The [Fitch] report confirms our continued success in utilizing our scale and financial strength to reinvest in resources that support the growth of our financial advisors’ businesses and bolster our leadership position in the wealth management space,” Jon Frojen, Osaic’s chief financial officer, wrote in an email. “We are confident that our decision to come together under the Osaic brand will further enhance the long-term financial stability and growth potential of our company.”
Osaic, formerly Advisor Group, is currently under the control of a private equity group, Reverence Capital. Osaic is a giant network of 11,000 brokers and financial advisors, with $500 billion in client assets. Its eight distinct firms are now operating under one brand and service platform.
In May, Fitch bumped up its rating on the debt of Osaic – then Advisor Group Holdings Inc. –
to B from B-, saying the firm’s outlook was stable. A year earlier, Fitch had called the debt for the holding company of the giant broker-dealer network “highly speculative,” a rating commonly referred to as junk.
“Fitch expects Osaic’s EBITDA margin, adjusted for non-recurring and non-cash expenses, to gradually improve, supported by larger operating scale, a growing proportion of higher fee-generating assets on the proprietary advisory platform and further cost optimization,” according to the ratings agency.
The stable rating on Osaic’s debt is an indication of the network’s “improving market position as one of the largest independent financial advisors in the U.S.; cash-generative business model; relatively flexible cost base, which should help cushion revenue declines in downward market environments; high advisor retention rates; and continued organic expansion that, over time, should lead to improved leverage and interest coverage metrics,” Fitch said.
On the downside, Fitch took aim at Osaic’s “still elevated leverage levels; weak interest coverage metrics; a relatively low, albeit improving, EBITDA margin; and the highly competitive environment associated with the independent broker-dealer and registered investment advisor, or hybrid RIA, business model.”
Fitch also stated that Osaic’s ratings are also constrained “by its private equity ownership, which introduces a degree of uncertainty over the company’s future financial policies and the potential for more opportunistic growth strategies.”
Fitch expects Osaic to continue to consider debt-funded acquisitions, which could yield periodic upticks in leverage, according to the ratings agency.
Osaic has been quiet this year on the broker-dealer mergers and acquisitions front after an extremely busy 2022, when it acquired American Portfolios Financial Services Inc. and Infinex Investments Inc.
Meanwhile, the company also announced changes in October to the pricing structure on its wealth management platform, switching to a flat fee for financial advisors with more than $50 million in assets. For advisors with more than $500 million in advisory assets, the fee will be zero basis points.
Osaic outlined the pricing changes during its annual conference, ConnectEd, which took place in Phoenix Oct. 22-25.
“We are simplifying pricing across our ecosystem,” Greg Cornick, Osaic’s president of advice and wealth management, said in a statement. “As a first step, we’re making advisory pricing on [the wealth management platform] more streamlined and less expensive.” Cornick added that the firm’s pricing will be “straightforward and market-competitive.”
During the conference, the firm’s executives gave details on forthcoming technology enhancements, according to the company.
Those enhancements include a revamped digital experience for advisors’ clients; a new and streamlined affiliation platform; improvements to the client and account management platform; and the introduction of a new financial advisor portal, OneHub.
According to Osaic, the new portal will offer an improved user experience and access to data, content, peer networks and apps advisors use.
Osaic is currently consolidating its eight broker-dealers into one firm.
“Shaping the Osaic brand into what we want it to be is the next phase for our company,” Jamie Price, the firm’s president and CEO, said during his opening address at the conference, according to the company. “We are turning the page to the next iteration of the industry, which allows us to be better partners to all our advisors.”
Fitch Ratings: Long-term issuer default rating for the company’s debt is at B, indicating a stable outlook
Margins: EBITDA margin was 14.6% as of midyear on a trailing 12-month basis, according to Fitch.
The downside? Fitch took aim at Osaic’s “still elevated leverage levels; weak interest coverage metrics; [and] a relatively low, albeit improving, EBITDA margin.”
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