Broker-dealer M&A: Is your firm next?

It seems obvious at this point that consolidation is a massive trend in the broker-dealer space. According to Finra, registered broker-dealers have been in steady decline for several years, dropping from 4,456 in 2011 to 3,869 at the end of November 2016.

With five substantial acquisitions taking place so far this year alone, there is no reason to expect this momentum to change. What’s not obvious though is how this consolidation affects advisers, depending on what type of takeover it is. Consolidation is not consistent. t comes in many forms and the way an ownership change takes place will determine how drastic the situation is for an adviser.

Here are the most common forms of consolidation, listed from least disruptive to most disruptive.

TYPE 1

When a purchaser buys the broker-dealer, leaving all functions intact. This commonly happens when a larger parent company buys a broker-dealer. We saw this in 2016 when Lightyear Capital purchased American International Group’s retail advisers, AIG Advisor Group. This typically results in little change for advisers.

If this type of purchase takes place at an adviser’s firm, the most important thing to do is look into who bought the broker-dealer.

What is their long-term plan? Are they looking to make changes in the short or long term? For example, do they own other broker-dealers that serve the same functions, therefore opening up the possibility of consolidation? Are they a private equity firm that has a history of selling within three to five years after purchase?

These answers may not cause an advisor to move immediately, but having clarity will make it easier should a move become necessary in the future.

TYPE 2

When a broker-dealer acquires a broker-dealer with the intention of rolling the advisers into their firm. We are currently seeing this in LPL’s purchase of the Jackson National broker-dealers. This form of consolidation comes in several forms and can result in little change to massive change depending on how it’s structured. If an adviser is facing this type of acquisition, he or she should evaluate the following.

• Is the acquiring broker-dealer a suitable business and cultural match for their practice? Advisers should take time to determine what changes, if any, will affect their business and if compensation or expenses will change. In other words, the due diligence process should be viewed similar to the process that was completed when the original broker-dealer was chosen.

In some cases the acquiring entity will keep the structure the same. Meaning payouts, expenses, clearing firm, ticket charges, administrative fees and product availability remain intact so that minimal change is felt. In other cases, advisers need to fit into the structure that already exists, resulting in potential changes for advisers.

• What is the process to move your book of business? This can be anything from a fairly simple process to a laborious process depending on how the transition is designed. For example, earlier in the year we saw Western International Securities acquire Financial West Group and Kovack Securities acquire TKG Financial.

In both cases, both the selling firms and the acquiring firms used the same clearing platform. A fairly streamlined process was structured so that minimal paperwork had to be completed, making the transition process minimal.

TYPE 3

When a broker-dealer goes out of business and does not have a secured firm to take over. This is the most disruptive and worst case scenario for any adviser. When this happens, although rare, it leaves advisers having to quickly find a new firm with which to affiliate.

In the 20 years I have been assisting advisers, rarely have I spoken to someone that was thrilled their broker-dealer sold. It can be a startling, stressful and an overwhelming process to discover and confront.

And while no one wants to face this reality, the environment we are in today is forcing thousands of advisers to do just that. If you should find yourself in this position, I suggest facing it head on. Immediately start asking questions to determine how much change you are facing and make decisions based on the long-term fit with your practice.

Jodie Papike is the president of Cross-Search, a third party, independent broker-dealer recruiting firm that connects advisers with broker-dealers and RIAs.