Broker-Dealer M&A Picks Up. Don’t Pop The Champagne Just Yet.

Larry Roth, CEO, Wealth Solutions Report

Four Summer Deals By LPL, Atria And Cetera Have The Industry Abuzz. Now Let’s Take A Closer Look At What’s Really Been Happening In IBD Deal Flow.

The era of massive independent broker-dealer mergers and acquisitions has not quite been resurrected, but the space showed renewed signs of life this summer thanks to LPL agreeing to acquire Crown Capital Securities, Atria acquiring Grove Point Financial, and Cetera acquiring certain assets of Securian and agreeing to acquire Avantax.

Before all those IBD executives crack open the champagne and toast to good times, it’s worth taking a closer look at what these deals might mean within the broader historical context of wealth management consolidation. Upon inspection, it appears that broker-dealer leadership would be wise to balance optimism with disciplined risk management regarding future M&A.

Summer Deals

July’s agreement between LPL Financial and Orange County, California-based Crown Capital Securities, a broker-dealer and RIA supporting approximately 260 financial advisors serving approximately $6.5 billion in client assets, was expected to allow Crown Capital advisors to continue operating independently after the deal closes in early 2024.

Announced in April and completed in early September, the Atria Wealth Solutions acquisition of Rockville, Maryland-based Grove Point Financial and its subsidiaries from Kestra Holdings brought approximately 400 independent financial professionals with $15 billion of assets under administration (AUA), raising Atria to nearly 2,700 financial professionals with nearly $120 billion of AUA.

Announced in January and completed in August, the Cetera Financial Group acquisition of the retail wealth and trust business of Securian Financial Group retained over 91% of the invited financial professionals, representing nearly $50 billion in client assets. The financial professionals and their teams became a distinct community, branded as Cetera Wealth Management Group, within Cetera Advisor Networks.

September’s agreement between Avantax and Aretec Group, which does business as Cetera Holdings, aims to bring Avantax’s 3,078 financial professionals, $83.8 billion in AUA and $42.6 billion in assets under management (AUM) as of June 30, by becoming a standalone business unit among Cetera Holdings’ subsidiaries.

Trend Or Fad?

Louis Diamond, President, Diamond Consultants

“Another one bites the dust … The announced sale of Avantax to Cetera marks another chapter in the IBD industry’s consolidation,” Diamond Consultants President Louis Diamond posted on LinkedIn. “While consolidation is normal across most industries, this deal raises the question: Are there ‘too few’ BDs left to drive competition and provide advisors with options that best suit their practices? While Avantax wasn’t a prolific recruiter, they filled a niche for CPAs with affiliated wealth practices.”

It remains to be seen whether these four deals truly marked the beginning of a fresh growth trend or whether they reflect opportunistic plays that happened to occur in relatively short succession. Furthermore, as long as the U.S. persists in a significantly higher interest rate environment than prevailed during the M&A frenzy of the previous decade, the elevated cost of capital could continue to weigh on deal flow.

Spending hundreds of millions to billions of dollars on a business is trickier when Federal Reserve target rates are 5.25% to 5.50% instead of when they are 0.00% to 0.25%. One potential benefit to higher rates is that some broker-dealers may be able to earn greater cash sweep revenues and yield income, and in turn bolster IBD valuations.

Even so, broker-dealer M&A has stayed well below its levels from the previous decade – which in some cases, I had firsthand experience with, as the former CEO of its key players.

Not-Too-Distant History

During that time period, Cetera’s acquisitions included Genworth Financial, First Allied Securities, Summit Brokerage Services, Foresters Financial’s U.S. broker-dealer and advisory business, and certain assets related to Voya Financial Advisors.

Meanwhile, Osaic’s predecessor brands conducted multiple waves of deals. These included adding Securities America, KMS Financial Services, First Midwest Securities, Signator Investors, and the Advisor Group merger with Ladenburg Thalmann.

On the private equity side, 2018 saw Genstar Capital Partners take a majority stake in Cetera and in 2019 Reverence Capital Partners acquired Advisor Group from Lightyear Capital, PSP Investments and other shareholders.

Even during the M&A doldrums of 2022, some broker-dealer transactions did stand out.

For example, in July of last year, LPL agreed to acquire the Private Client Group business of West Conshohocken, Pennsylvania-based broker-dealer and RIA Boenning & Scattergood, which closed in February 2023 and onboarded approximately $4 billion of client assets.

Announced in May and completed in October 2022, Osaic’s predecessor brand, Advisor Group, acquired the financial institution-focused broker-dealer Infinex Financial Holdings. At the time the deal was announced, Infinex had approximately $30 billion in assets and over 750 financial professionals in more than 230 bank and credit union-based wealth management programs.

In June 2022, Advisor Group announced the additional acquisition of American Portfolios Financial Services, a broker-dealer with approximately $40 billion in client assets. That deal closed in November.

Advantage, RIA?

RIA M&A activity also has fallen off from its Q4 2021 heights. According to wealth management M&A consultancy DeVoe & Company, Q4 2022 RIA M&A activity fell 20% from the previous year’s time period, Q1 2023 fell a further 7% and Q2 2023 fell 15%. DeVoe anticipates Q3 2023 will be the first quarter that’s higher than the year-prior same quarter since Q3 2022, and that 2023 will have fewer total transactions than 2022.

Nevertheless, on a historical basis, RIA mergers and acquisitions are still quite healthy. According to wealth management investment bank ECHELON Partners, the first two quarters of 2023 had more total deals than the first two quarters of 2017 through 2021, and the average assets per deal for the first two quarters of 2023 exceeded full-year figures for 2018 through 2020.

Of course, large broker-dealer business models and economics traditionally have differed considerably from RIA business models and economics. The broker-dealer value proposition to recruit and retain thousands of advisors – who in turn demand versatile affiliation options, payment structures and custodial arrangements – calls for assuming major upfront costs that far eclipse what RIAs typically incur.

This ranges from supplying institutional-level trading and technology platforms for advisors to assisting them with compliance, professional development, succession planning, loans and more. And that’s before covering any regulatory fines that may arise from occasionally failing to stay on top of so many moving parts.

As a result, conducting successful broker-dealer M&A often requires minimizing post-transaction redundancies, while leveraging complementary core competencies that can augment the larger entity’s overall capabilities, in order to increase competitive advantage. In other words, broker-dealer M&A must go far beyond capturing market share, boosting assets and achieving scale.

Models Converge?

John Phoenix, Founder and Partner, Wealth Advisor Growth Network<

According to Fidelity, for years now independent broker-dealers have been consolidating in the face of factors such as increasing margin pressure, regulations that threaten revenue streams and lower productivity among advisors than practitioners in other channels. This is leading broker-dealers and large RIAs to look increasingly similar in terms of their strategic objectives and advisor platforms.

“Some feel I have an axe to grind regarding Independent Broker Dealers,” John Phoenix, Founder and Partner at Wealth Advisor Growth Network, posted on LinkedIn. “My issue is when IBDs try and misrepresent themselves as RIAs. For many advisors an IBD structure is a really good fit.”

In fact, by some measures, LPL itself is looking to gradually acquire more of that RIA mojo. That could be part of its strategy behind the IBD expanding its Liquidity & Succession program. LPL launched it last year for LPL-affiliated advisors looking to sell their practices. Now LPL also makes the program available to advisors who are not affiliated with the company.

Jeff Lowrie, Director, National Sales, Sandhill Investment Management

It is open to advisors at any stage of their career, but focused on those who plan to retire within three to seven years. It utilizes M&A transactions to enable advisors to maintain their brand, investment philosophy and client service model – while gaining LPL’s strategic and operational support through a W2 model that lets advisors offload their business operating duties.

“Even though M&A activity across the RIA industry has slowed that doesn’t seem to be a concern for LPL,” Jeff Lowrie, Director, National Sales at Sandhill Investment Management, posted on LinkedIn. “This expansion aligns with LPL Financial’s commitment to supporting advisors across different models and offering them a unique alternative to traditional RIA investors.”

Larry Roth is CEO of Wealth Solutions Report and Managing Director of RLR Strategic Partners.

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