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With Voya Deal, Cetera Nears ‘Critical Mass’ to Go Public: Recruiter

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Industry experts on Monday weighed in on what they saw as the potential positives and negatives of the announcement that Cetera Financial Group is acquiring the independent financial planning channel of insurer Voya Financial.

Cetera is “getting [to] around 10,000 reps now, which is a critical mass where it becomes practical to go public,” recruiter Jon Henschen, president of Henschen & Associates, told ThinkAdvisor.

He predicted the latter will happen in the “not too distant future.” The acquisition will also give Cetera more scalability, the recruiter noted.

However, Tom Taylor, Cetera chief sales and growth officer, said Monday: “We do not have any plans to go public at this time.”

The Voya deal should bring about 900 independent financial professionals with $40 billion in client assets to Cetera, giving it a total of roughly $300 billion in assets and nearly 9,000 financial professionals when the deal is completed later this year, the broker-dealer network said.

However, a combination of factors will determine Cetera’s success at retaining those Voya advisors, Henschen said.

For one thing, “Are the advisors excited about the story?” he asked. Also, what kind of retention bonuses will Cetera offer to the advisors, “how little disruption will there be, and what kind of changes will there be as far as their costs, including advisory administrative fees?”

The fees will likely be higher at Cetera, and it would be a good idea for Cetera to “grandfather in” any fee hikes to those advisors, Henschen said, noting that if the company doesn’t do that there may be “sticker shock” for the advisors.

One possible negative for Cetera would be if a credit ratings agency were to downgrade the rating and/or outlook of parent firm Aretec, because it likely will finance the deal with a combination of funding from private-equity investor Genstar Capital (which owns a majority stake in it) and issuing more non-investment grade bonds, he warned.

Voya said in a statement that the deal would provide it with more than $300 million in deployable proceeds at closing.

See: Cetera Acquiring 900 Reps from Voya

Moody updated its outlook on Cetera Financial Group holding company Aretec Group last month, returning its outlook to “stable” from the “negative” outlook given to it in 2020. However, Moody’s maintained its Corporate Family Rating of B3 for the firm. B3 is the rating that it gives to firms considered speculative and subject to high credit risk.

Moody’s did not immediately respond to a request for comment on Monday and Cetera did not provide any financial terms of the transaction.

All Positives for Voya

The deal, meanwhile, made complete sense for Voya, Henschen said.

After all, “since they weaned themselves away from the insurance side of their business, having the independent broker-dealer seemed to make less and less sense for them” as they focused more on retirement planning, he said.

As Voya itself said Monday, “the transaction reflects Voya’s increased focus on institutional clients and financial planning support that is closely aligned with the worksite.”

In addition, Voya’s independent BD “was just a long-term financial drain on them, especially with all the litigation and the FINRA fines they paid over time,” according to Henschen. Voya has also “struggled with growing advisors to their broker-dealer,” he added.

Size Matters

“Cetera has been a veteran acquirer over the years, so I’m sure that they will have the usual retention compensation plans in place” to keep the Voya independent BDs, according to Timothy Welsh, president, CEO and founder of the consulting firm Nexus Strategy

“After all, the success of the deal is in how many advisors and assets transition over, so they’ll be focused and ready,” he predicted.

Consolidation, meanwhile, has been widely predicted in the independent BD space “for quite some time now as margins get squeezed by investment commoditization and increased technology and regulatory requirements,” Welsh said.

“As a result, we will see a handful of mega-firms dominating. Cetera is certainly in that conversation,” the consultant explained.

But he added: “History shows that no broker-dealer, whether a wirehouse” or an independent BD, “has ever grown past 20,000 advisors. That seems to be the upside limit as firms get larger, more and more risk rises and the span of control is just too large to manage. Size is still a strength in a commoditizing industry, though, so they do need to continue to push that upper limit.”

In terms of competitive upside for Cetera from the Voya deal, Welsh said it’s a “mixed bag” because “you do lose some part of your culture with every deal, so that aspect takes a hit.”

However,  “bigger size means more resources to promote over smaller and midsize firms” it’s competing with, he added.

Related: Advisor Group, Cetera Outlooks Upgraded to Stable: Moodys