From the October 2008 issue of Investment Advisor • Subscribe!

Is Consolidation Finally Here?

Several recent deals for mid-sized independent B/Ds raises the question

In what could be further evidence of consolidation in the independent broker/dealer space--or of the enhanced value that winning Investment Advisor's Broker/Dealer of the Year brings to honorees--another mid-sized independent B/D has been acquired by one of its larger brethren.

Securian Financial Group, the St. Paul, Minnesota-based insurance and financial services firm which is the parent company of Minnesota Life Insurance Co., said September 10 that it had signed a definitive agreement to acquire independent broker/dealer Capital Financial Group/H. Beck. When combined with Securian's broker/dealer, Securian Financial Services, the combined B/D will have about 2,000 representatives operating in all 50 states. In its announcement, Securian said CFG's senior management, which would include president and CEO Eric Meyers, will "remain in place," that it will "continue to operate independently in Maryland," and that it did not anticipate making any layoffs at either firm. In Investment Advisor's 2008 broker/dealer survey, with data as of April 1, CFG/H. Beck reported 2007 revenue of $77.3 million produced by 680 reps. At the same time, Securian reported 2007 revenue of $118.5 million produced by 1,170 reps.

Meyers said in the announcement that Securian's private, mutual governance structure, which allowed the firm to follow a "thoughtful, long-term approach when making strategic decisions," matched well with CFG's culture. That concern with culture is nothing new for Meyers, whose firm won Investment Advisor Broker/Dealer of the Year honors in 2007. In an interview in April with the leaders of the other winners, Meyers answered a question about recruiting by saying that the firm's biggest challenge was "keeping a high level of advisor service and staying relationship-oriented as we continue to grow."

This is the second of the four winning 2007 Broker/Dealers of the Year to be acquired in recent months; in August, Securities America said it would acquire independent B/D Brecek & Young, creating a firm that in 2007 would have had combined revenues of about $550 million and slightly more than 2,000 reps.

In an interview with Investment Advisor's Melanie Waddell at the time of the announcement, Brecek & Young president, chairman, and CEO Chris Ranney said that Brecek's parent, Security Benefit Corp., "decided it was in the best interest of all parties" to find a new owner for B&Y, one "with a core competency in the B/D and investment advisor marketplace."

Ranney says he's been witnessing consolidation in the independent B/D market for the past number of years, with "dual registrant broker/dealers and RIAs aligning themselves with larger firms who have more expertise, technology, resources, capital, and so on to be able to provide more and better services to their representatives."

No Longer a Cottage Industry

When the leaders of the four winning Broker/Dealers of the Year for 2008-2009 met for an editorial roundtable in Chicago in August, the issue of consolidation arose when I asked if size alone was necessary to ensure survival as an independent broker/dealer. After all, look at the biggest independent B/D, LPL, which has hedged its traditional broker/dealer business risk by offering clearing services to outside firms and, more recently, launching a custodial service. That's not exactly how Nick Sondel of Harbour Investments sees it. "If you look at the big firms," referring to Bear Stearns in this instance, "you'd never have guessed that these big icons of the industry would have dissolved. I wonder if LPL, with taking on all these different roles, is kind of mimicking the wirehouses. It's more risk. It's harder to watch the shop when you're doing 20 different things." Sondel thinks the "mid-sized firm has got a good future." There have been benefits to being small, notes Sondel, and as the founder and leader of a firm with only 195 representatives, he knows whereof he speaks. But some of those benefits may be on their way out. "I think the small firms will have a real tough time keeping up because they've been overlooked by regulators unless they've had some complaints," Sondel says.

Ralph DeVito of The Investment Center argues, however, that "there will always be a place for any sized firm," said, "as we get bigger, as long as you can continue to provide good service--whether you have 1,000, 2,000, or 3,000--you can continue to do that, but you have to stay focused on what you're good at. When you start spreading it out, you become a totally different kind of firm."

NEXT Financial has expanded its lines of business as its rep force has grown, following what President Barry Knight calls "an intelligent growth model. Since many of its reps own a piece of NEXT, "if we see a lot of our reps [wanting to offer a product or service], and we have the size and the critical mass to do so, I'd rather we do it than giving money away to some other company." That expansion, says Knight, is "all tied into our core."

But Eric Schwartz of Cambridge Investment Research says that "Linsco would argue that everything they've done is part of their core. They've built the capacity to clear for themselves, so why not clear for others?" Schwartz notes that "we were a cottage industry 20 years ago. Now, broker/dealers and reps are becoming institutions." As the industry moves from its "adolescence into maturity," argues Schwartz, "you end up having more segmentation as firms try to find their niches in a much bigger industry.

He thinks that there will be three different categories of independent broker/dealers in the near future: small niche players; "really large ones" who "can be, somewhat, all things to all people" because of their very size; and those in the middle. To survive, he believes mid-sized firms will need "to build a value proposition that isn't identical to everybody else's." He argue that "when you get a crowded industry, the ability to have a divergent formula, to distinguish yourself from a group whose core capacities are very similar, is what makes you successful." Finally, he says, to succeed in the B/D business, "it's one thing to do it," you also need "to have a brand that's identified with doing it."


Editorial Director James J. Green can be reached at jgreen@investmentadvisor.com.

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