With the recent sales of broker-dealers, have you noticed how many BDs in the top 50 are privately owned? This was the question posed to me by David Fischer, CMO of Independent Financial Group, a broker-dealer based in San Diego.
Frankly, I hadn’t thought about it. So I did some research. In 2008, there were 20 broker-dealers in the top 50 that were privately owned. Fast forward to 2014 and that number drops to 10, a 50% decrease.
During our conversation, Fischer said that his group is loving the fact that his firm is part of a decreasing pool of privately owned broker-dealers because their recruiting has been on fire—they recently brought on a $1.5 million producer within weeks of obtaining another large producer group.
One Master Is Better Than Two
Privately owned broker-dealers have always been attractive, primarily due to the fact that they can focus solely on serving the representative rather than two masters—the rep and corporate interests. This is reflected in another conversation of mine with a recruiter who had just left a large insurance-owned broker dealer. He shared a story about the president of his former broker-dealer who seemed fixated on pleasing upper management of the insurance parent company. Satisfying them meant cutting costs. One of his “brainstorms” was to buy cheaper booze for an upcoming conference—a move far more likely to irritate reps than impact any real cost efficiencies.
It boils down to this: With loyalties divided, insurance-owned broker-dealer management must cater to insurance company interests. Publicly traded broker-dealers need to satisfy shareholders. Privately owned firms have a singularity of focus that is reflected in a high-touch culture that is centered on representative concerns.
Balancing Representative and Corporate Interests
If you look at service surveys in our industry publications, that attention to the reps’ needs is reflected in a broker-dealer’s high scores and rankings. With the recent purchases of numerous midsized, privately owned broker-dealers (VSR, Girard Securities, KMS, WRP, SSN), the question will undoubtedly arise. Can these firms maintain the singular focus they had or will they have their attention splintered to parent company interests or satisfying shareholders? What makes this question even more tantalizing is the wildcard in our industry: the Schorsch empire. How will the broker-dealers in that empire achieve the balance between corporate and representative interests?
Rewards for Buyers and Sellers
The timing of these broker-dealer sales is ripe for both parties. Sellers are being rewarded with prices we’ve never seen before in our industry. Where 30% to 40% of trailing revenue was the common range in the past, now prices as high as 100% are being offered.
For buyers, their reward is obtaining broker-dealers at the bottom of the interest-rate cycle, which will translate into ever-increasing profits when money market rates begin to trend up (prior to 2008, money market rates accounted for up to half of a broker-dealer’s profits; money markets also contribute mightily to RIA custodians’ bottom line, by the way).
For Nicholas Schorsch, purchasing firms with substantial American Realty CAP REIT sales at what appears to be an expensive price for their broker-dealers is actually quite reasonable when you consider the savings in revenue sharing they will pocket.
The challenges for these BD purchases will be retention of reps, especially the higher producers that every BD wants, and keeping representatives engaged with management.