As expected, broker-dealer mergers and acquisitions are beginning to heat up, with small to mid-sized independent broker-dealers being gobbled up by larger copmpanies.
Western International Securities Inc. will acquire close to 200 retail brokers of Financial West Group, according to three sources with knowledge of the transaction. The deal is structured as an asset purchase agreement, according to a source, and Western International is not purchasing Financial West's institutional business.
Meanwhile, Kovack Securities Inc., a mid-sized firm that generated $65.4 million in total revenues in 2016 and is home to approximately 400 advisers, said on Monday it was purchasing the assets of TKG Financial, a small IBD with around 10 advisers and more than $200 million in client assets. And the firm's president, Brian Kovack, said it was not done with deal making.
"It's a good M&A market right now," he said. "We are looking to announce a similar deal soon."
Mr. Kovack said his firm has 30 reps in California already and the TKG deal will boost that number to 40, with the addition coming in Santa Barbara. "They keep the brand name, the employees, the location. These folks don't want to go to a large firm and be absorbed with thousands of advisers."
Terms of the Kovack Securities deal were not disclosed.
The price Western International Securities paid for the retail brokers of Financial West Group was not known.
Financial West Group's CEO, Gene Valentine, declined to comment. Western International's CEO, Don Bizub, also declined to comment.
At the start of the year, many brokerage executives predicted that
the brokerage industry would see a steady pace of consolidation in 2017 as it did in 2016.
Independent broker-dealers have seen margins compress steadily since the credit crisis as record low interest rates ate into their bottom lines. New regulations such as the Department of Labor's pending fiduciary standard for retirement accounts have hampered the sale of high-commission products such as nontraded real estate investment trusts and variable annuities, increasing the pressure on firm finances.
Deal-making for independent broker-dealers has been slow but appears to be picking up steam.
National Holdings Corp., which controls two independent broker-dealers with about 1,100 reps, said in March it was acquiring the assets of Williams Financial Group, including its broker-dealer, WFG Investments, with about 230 financial professionals.
Then, in April,
Ameriprise Financial Inc. said it had agreed to buy Investment Professionals Inc., an independent broker-dealer based in San Antonio, Texas, with 200 reps operating out of more than 140 financial institutions in 29 states.
Western International has close to 250 advisers. Financial West reported $40.4 million in revenues and a net loss of $87,000 in 2016 for the fiscal year that ended in September,
according to a filing with the Securities and Exchange Commission.
MORE OPPORTUNITIES
"There are still a lot of
consolidation opportunities out there," said Ed Cofrancesco, president of International Assets Advisory, an independent broker-dealer. "The owners tend to be my age or older, in their mid-fifties, and they're looking for an exit strategy. Costs of running a broker-dealer go up each year, and that puts a lot of pressure on B-D owners."
When the former nontraded real estate investment
trust czar Nicholas Schorsch went on a buying binge of broker-dealers during 2013 and 2014, the valuations for firms got out of whack because Mr. Schorsch was paying top dollar through his broker-dealer holding company, RCS Capital Corp., Mr. Cofrancesco said.
A few years ago, owners of an independent brokr-dealer that generated $20 million to $40 million in revenue annually believed they could get a valuation of 50% of annual revenue, he said.
"Now, valuations are coming back down to earth," he said. "That same type of firm is likely to get 25% to 30% of revenue."
