These are tough times for the independent broker-dealer space. Pacific West’s announcement in early December that it was discontinuing operations was the latest in a string of similar announcements from small- to medium-size firms. Fee compression, revenue hits, product-related lawsuits and new regulation seem to be disproportionately affecting the industry. But someone, apparently, is finding value, if the private equity acquisition trend is any indication.
The announcement Tuesday that COR Securities will buy Legent Clearing is just the latest in a long line of purchases by private equity funds. A sampling:
- Lightyear Capital owns MultiFinancial, Primevest and Financial Network Investment Corp.;
- Lovell Minnick is the majority owner of First Allied and 30% owner of Plan Member Securities;
- Partheon Capital Partners purchased HD Vest from Wells Fargo;
- LPL Financial is owned by two private equity firms but is now publically traded.
“When you look at the economic and regulatory environment in the independent broker/dealer space, it makes perfect sense that they would become a target for the roll-up business model,” says Jeff Joseph (left), managing partner of Prescient Capital Partners and an AdvisorOne contributor. “Private equity firms like the BDs' scale, low margins and the fact that redundancy can be eliminated by merging firms together, like in the back office, for instance. They’re really just buying the sales and marketing arms, which are the advisors themselves.”
What Sarbanes-Oxley did to small IPOs, he explained during a phone interview, is similar to what the current regulatory environment is doing to small broker-dealers, who can’t afford the liability associated with questionable products and strategies.
The result is that it forces advisors to go with a business where selling away isn’t allowed and selling agreements contain approved products, he says, which in turn results in a more commoditized market in which smaller broker-dealers will have trouble competing due to their lack of size and scale.
“It will ultimately mean even more of a bifurcation between RIAs and BDs,” Joseph adds. “RIAs will be the real differentiators in the marketplace. You’ll have RIAs on one side of the barbell and large BDs on the other with no room for independent broker-dealers in between. They’ll be less competition and less product originality, which will be bad for clients, but it might be great for RIAs.”