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In distribution play, Nationwide to acquire Jefferson National

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The Department of Labor’s fiduciary rule is barely 5 months old, but it’s already shaking up the industry, and in a big way: Industry giant Nationwide Financial disclosed today its intent to buy Jefferson National.

The acquisition will avail Nationwide of Jefferson National’s registered investment advisors (RIAs) and fee-based advisors, a distribution network of 4,000-plus financial professionals who sell investment products and services. Chief among them: Monument Advisor, a flat-fee variable annuity platform that offers consumers access to 380-plus tax-advantaged investment options from over 30 mutual fund families.

Related: M&A activity among insurance agencies hits 8-year high

“After launching Monument Advisors 10 years ago, we recognized that we wanted to do two things,” says Jefferson National CEO Mitchell Caplan. “One was to turbo-charge our 4,000-strong advisor distribution channel, boosting the number to 10, 20 or 30 thousand advisors. Second, by partnering with Nationwide, we’re able to take our organization to the level: allowing us to serve clients in the way they want to be served—whether through a fee-based advisor, or a broker working on commission.”

Nationwide Financial President and Chief Operating Officer Kirt Walker echoed the point, noting that, in the wake of the DOL rule, more investors will be turning to fee-based advisors for retirement plan products and advice. As the transition accelerates, insurers like Nationwide will need to be able to service consumers through their preferred distribution channel, whether agents, broker-dealer reps, RIAs or other fee-based financial professionals.

By acquiring Jefferson National, said Walker, Nationwide can do business with clients “on their terms.” As Nationwide mostly sells through insurance agents and brokers, the addition of Jefferson National’s 4,000 RIAs and fee-based advisors, he added, “makes for a perfect complement” to the carrier’s distribution force.

Under the agreement, Nationwide Life Insurance Company will purchase all of the stock of Jefferson National, which will become a wholly owned subsidiary of Nationwide. The companies did not disclose other terms of the purchase agreement. Both parties, which are privately held, expect the transaction to close early in 2017.  

According to company spokesperson, Nationwide has relationships with more than 33,000 advisors and 7,000 agents at 1,500-plus firms. Company sales and net income last year totaled $43 billion and $1.2 billion, respectively.  

Specific to financial services, Nationwide’s 2015 sales were $23.7 billion; net operating income was $1.1 billion and managed customer assets grew to $210.1 billion. As of June 30, 2016, Jefferson National reported $4.7 billion in GAAP assets. 

Just how much did the DOL fiduciary rule play into the companies’ decision to merge? The executives interviewed by LifeHealthPro said that it was a key factor — but not the only one. Also integral to the decision was a desire to expand the companies’ footprint (a strategic goal predating the DOL rule) in part by expanding products available to consumers.

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“We now can offer a greater variety of products and services, all engineered to fit a fee-based model,” says Jefferson National President Larry Greenberg. “That will allow us to build on our existing relationships with clients.”

Related: NAIFA survey: Fiduciary rule likely to reduce retirement advice

That said, the executives acknowledge that the pace and size of mergers and acquisitions within distribution channels catering to retirement space will likely increase in the coming years. Rising compliance costs (both DOL and non-DOL-related), rapidly evolving technologies (think “robo advisors and direct-to-consumer initiatives), as well as consumer demand for a broader array of low-cost investment and retirement products will fuel company buyouts and partnering.

“[This deal] is the culmination of what’s already been happening in the insurance and financial services space,” says Jefferson National’s Caplan. “The world began to change 20 years ago, as the advent and adoption of the internet put more power into the hands of the consumer.

“How they choose to execute on their financial objectives — whether through direct to consumer initiatives or through an advisor or agent — doesn’t matter,” he adds. “You have to build your business model to meet the needs of consumers in the way they want to be served.

Notes Nationwide’s Walker: “This transaction is helping advisors and customers do business on their terms. That’s the way the world is today.”

Providing such expanded choice absent a rise in advisors compensation for services could, however, be a challenge, given increased compliance requirements and costs expected in the wake of the fiduciary’s rule’s finalization in April.

A survey by the National Association of Insurance and Financial Advisors, unveiled at NAIFA’s annual conference this month in Las Vegas, revealed that nearly half (49.5 percent) of NAIFA members who provide retirement plan products or services to individuals or businesses in the past 12 months expect their compliance costs to rise “significantly.” And an additional 29 percent expect costs to rise “modestly,” with 11 percent saying they’re not sure.

More half of the NAIFA members (56.7) surveyed foresee the rule having negatively impacting their ability to serve clients. Just over a quarter (27.3 percent) believe the effects would be mixed. Only 3 percent anticipate a positive impact.

Future combinations will accelerate M&A activity already underway. A February report by the consulting firm Devoe & Co. pegs the number of mergers and acquisitions among RIAs last year at 123, a 37 percent increase over the record-setting 90 deals consummated in 2014.

“DeVoe & Company expects the overall trajectory of RIA M&A activity will maintain its upward momentum over the next decade, though the number of transactions may ebb on a quarterly or annual basis,” a Devoe report states. “Structural changes to the industry on both the sell-side and the buy-side will continue to drive consolidation.”


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