SunAmerica CEO Broad to expand sans key exec

On the eve of an all-out expansion, SunAmerica Inc. has lost the general who built the company’s independent broker-dealer network into a national powerhouse and was widely expected to help lead the latest drive.

Gary Krat, chairman and chief executive of SunAmerica Financial Network Inc., the broker-dealer operation, resigned at 52 last month because of a throat ailment, InvestmentNews has learned.

SunAmerica Inc.’s chairman and chief executive, Eli Broad, 66, said in an interview that he would take a more active role in managing the broker-dealer operation in Mr. Krat’s absence.

A spokesman confirmed Mr. Krat’s departure, but said he will remain available as an adviser. His departure was not publicized until InvestmentNews asked about it.

The latest development follows the resignations late last year of the presidents of two of the brokerages, which industry observers say had already left a leadership vacuum (InvestmentNews, Oct. 11).

Mr. Broad said he is heading a management committee comprising the heads of the company’s six broker-dealers that will oversee the operation. There is no immediate plan to replace Mr. Krat.

In the interview, Mr. Broad also revealed for the first time that he is planning to expand the company’s broker-dealer sales force by more than 50% within three years.

As it is, analysts say the expansion could be tough, given the increased competition, now that everyone from wirehouses to banks is copying that business model.

The loss of Krat, however, could create even more of a problem.

“Gary Krat put this brokerage force together,” says Larry Papike, head of broker placement firm Cross Search Inc. “He was the leader of all these broker-dealers; he was the one who went out and bought them. Who’s going to take over and make that happen?”

Mr. Broad says the company is shooting to increase its brokerage force from 9,700 to 15,000 by 2003.

Strongly backing the move, says Mr. Broad, is American International Group Inc., which acquired SunAmerica in 1998. “Since we joined AIG we have a bigger appetite than ever,” he says.

That includes acquiring smaller independent broker-dealers as well as recruiting individual planners. Mr. Broad says the company is increasing the number of recruiters at each of the six broker-dealers, though he would not cite numbers.

SunAmerica’s strategy has made it by far the largest network of independent broker-dealers in the country, and sales continue to increase.

The Los Angeles-based annuity specialist more than doubled its retail broker force from 3,500 reps in 1994 to more than 9,700 at the end of 1998.

The strategy also pushed revenues to a record $900 million in 1999, a 16% increase from 1998’s $790 million, company figures show. Mr. Broad says the firm expects to break $1 billion in sales in 2000.

Some industry observers, however, question the strategy.

“It’s a great idea, but there are very few viable plans to create that kind of growth,” says Steve Gresham, a consultant in Madison, Conn.

“The easy money’s already been made. The people who were worth buying were bought; very few of the others want or need to sell out. The remainder are the cats and dogs of the industry,” he says.

The problem, observers say, is that the firm has done little to enhance the technology and back-office services of the broker-dealers it has already bought, which has led to some defections.

It is estimated that National Planning Corp., the fledgling broker-dealer of Jackson National Life Insurance Corp., alone has hired 300 advisers from the SunAmerica network.

Mr. Broad denies that many brokers have left for National Planning and played down the rival’s threat. In fact, he says “several” of the reps that have been lured away with big upfront payouts are now trying to come back.

As far as banning bulk transfer of clients, Mr. Broad says the company does allow it on a case-by-case basis.

Mr. Broad also acknowledges that his outfit’s services were stretched. “We had very good service, frankly, until about 18 months ago. We grew and the quality of our service did not keep up.”

That’s why SunAmerica stopped its hiring in 1999, says Mr. Broad.

So the company spent the year building up the back offices of the broker-dealers, he says, as well as increasing its compliance efforts.

“We’re being mentioned by these regulatory agencies, informally, as having a model others should follow,” Mr. Broad says.

Now, he says, the company is ready to start increasing its sales force again. The company is hiking its several-million dollar advertising budget by 20% this year, and Mr. Broad says it will invest more in broker-dealer technology.

“We’re going to grow rapidly, but not at the cost of service,” he explains.

Kenneth Kehrer, an industry consultant in Princeton, N.J., says SunAmerica’s expansion goal is not overly aggressive, considering what he sees as another wave of consolidation coming through planners.

“They’ve exceeded their goals every time in the past,” says Mr. Kehrer. “I wouldn’t bet against them this time.”

Mr. Broad remains adamant that the firm has no intention of consolidating its broker-dealers or their back-office operations, but will work with a common computer system.

“We’re not centralizing,” he says.

He did say that it might make sense to consolidate future purchases, depending on their size.

“Let me say this, we’re not going to decrease the number of b-d’s we have now,” he explains.

SunAmerica will also continue its succession planning program, called i-value, which helps planners to sell their practices and provides financing and valuation services. Mr. Broad says the company plans to announce a large number of transactions from the program soon.