The announcement on Wednesday that RCAP Holdings, led by real estate investor Nicholas Schorsch, is acquiring independent broker-dealer First Allied Securities from Lovell Minnick Partners has prompted experts to debate the role of private-equity in the broker-dealer industry—particularly the independent broker-dealer field.
To get an in-depth perspective on the subject, AdvisorOne spoke with Philip Palaveev (left), CEO of the Ensemble Practice, an advisory-practice consulting firm based in Seattle. He addressed the following questions:
Why does there seem to be so much interest by investors in broker-dealers like First Allied?
We are seeing the investment-advisory industry, including wealth management and financial management, mature, and as it does, it’s consolidating.
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You also see mergers & acquisitions when an industry is successful. By and large, consolidation is a sign of success —and that means it attracts institutional capital, because the industry needs more money from private equity, public markets and other sources.
Broker-dealers have consolidated a lot, very heavily. First Allied was institutionally owned already, so it’s essentially going from one professional investor to another and not really changing character.
The news, though, was definitely surprising to see, but you don’t have to read a lot into it. Independent broker-dealers will continue to attract the interest of investors, because it’s a very successful business, and the growth potential attracts opportunistic capital.
So, current investor interest is related to the evolution of the industry?
It’s very, very true for any industry in transition or a young industry moving to a more mature stage. That’s because as young, entrepreneurial firms grow into larger, more sizeable competitors, institutional capital steps in as owners. Lots of capital is needed for larger firms [to operate successfully], and that can’t be supplied by individual entrepreneurs.
This is true for financial advisory firms, broker-dealers, wealth-management companies—everybody. We are seeing this trend, along with consolation and institutional ownership, as larger entities need more capital. How much can a family wealth office, investment advisory firm, or other play in the financial planning industry afford? These trends are true of every player, not the just the broker-dealer industry, including RIAs and the wirehouses.