Living In Limbo

AIG, now majority owned by the U.S. government, is shopping around its indie b/d subsidiary, the AIG Advisor Group. But only a small number of reps affiliated with AIG’s b/d have decided to bail. Why?

But not every advisor is heading for the exits. One Royal Alliance veteran with about $170 million in client assets says he was concerned about his future when news of AIG's problems broke — at first. Even though he gets calls from rival firms on a weekly basis, he's decided to stay put. “The game plan is to sell us to someone who respects our independence,” he says. “If that's the case, then I don't have to leave. I respect the management at Royal Alliance. Art Tambaro [president and CEO of Royal Alliance] is a unifying force. It's a great broker/dealer. It just happens to be owned by a flaky company.”

That's the predicament many reps in the AIG Advisor Group are facing these days: Ditch the firm — and the unflattering associations that come with it post bailout — as quickly as possible, or wait it out. Of course, the retail brokerage unit had nothing to do with the parent company's credit default swap mess, but they have certainly been caught in the crossfire: To raise cash, AIG is trying to sell off its b/ds. Among the units on the chopping block is AIG Retirement Services, which includes the firm's three independent broker/dealers. For now, it seems like most advisors at the b/ds — AIG Financial Advisors, Royal Alliance and FSC Securities/Advantage Capital — are choosing to stay put and see what kind of buyer emerges. The reps who have left since early September represent just 2 percent of the b/ds' combined revenue, according to the AIG Advisor Group. “We're holding on,” say AIG reps. But for how long? And for what exactly?

STAYING PUT (FOR NOW)

It's hard to say how long AIG will shop the retirement services unit around — and how long advisors' wait-and-see attitude will last. These days, there aren't many cash-ready buyers — that's a problem, since a prolonged limbo could eventually thin the FA ranks, says one advisor who has yet to make a decision about leaving. Meanwhile, rival firms are on the recruitment war path. “Reps are dipping their feet elsewhere because they don't know where their b/d is going to end up,” says one recruiter who works with independent b/ds. “Meanwhile, you've got a whole community of independent b/ds telling them how much better they are than AIG's b/ds. They're recruiting like mad. They're talking to as many AIG b/d reps as they can,” he adds.

Not surprisingly, AIG Advisor Group CEO Larry Roth has this message for his advisors: Stick around. “There is no reason to be looking for a new broker/dealer. How do you know whether or not you'll be unhappy at this point?” he asks. In any case, Roth says that 2 percent in revenue loss since September due to advisor departures isn't so bad. In fact, the number stood at 3.5 percent for all of 2007. “That's slightly up, but not by that much when you consider what's happened,” Roth says.

Among the advisors staying with the AIG network is New York-based Henry Asher who says Royal Alliance, his b/d, is trying hard to keep its advisors happy. And it's working — at least for him. “The most important thing right now is how my day-to-day is being affected. Is the customer service still working? Is the trading desk still operating properly? Are fees being collected and dispersed in a timely manner? All those things are running smoothly,” he says. Meanwhile, he says calls from recruiters come in frequently offering details about upfront deals, some worth seven figures. But it doesn't appear to lure him too much. “I have to give Royal Alliance credit. There's been no significant impact on my business, and that's something to think about,” he adds.

For an Oklahoma-based advisor who's been with AIG Financial Advisors for 22 years, leaving and joining a new b/d now would be somewhat irresponsible, he says. “I think it's premature to bail out on a broker/dealer right now. Taking your clients through a very difficult transition at a time when they already have a lot of angst about their accounts is not going to be helpful for anyone,” he says. So as long as the b/d is doing “no harm,” his group isn't planning to move.

Consultants and advisors say switching b/ds is disruptive and involves a potential loss in revenue. In general, there are three costs associated with switching to another independent b/d: If the new b/d clears through Pershing, for example, and the old b/d worked with National Financial, then account closing charges must be paid. Typically, it costs between $50 to $100 per closed account. (Although in some deals, the new b/d or new clearing firm may pay the cost.) Then there is the hassle of repapering client accounts, which involves drawing up new account forms for clients, mailing them off, and getting clients to fill out the paperwork and then send it all back. There is also the potential loss in revenue that comes from using up time that otherwise would have been spent with potential clients. “Typically, an advisor loses a couple months of revenue. The transition cost is such that it makes reps reluctant to change firms unless they really feel they have to,” says Philip Palaveev, CEO of Fusion Advisor Network.

One way to keep them on board? Money. Some reps on the AIG network say the higher-ups have dangled offers of retention bonus money since the government bailout. These offers are made on a case-by-case basis. Some say the money is promised to advisors who stay regardless; others say management has promised to deliver retention bonuses only after a buyer comes forth. Roth says retention bonuses will be discussed after a buyer is identified, but wouldn't say what the timeline on that may look like.

INDIE ADVISORS LOOKING FOR RICH MATE (MUST LOVE IBD MODEL!)

The AIG Advisor Group itself has been through a significant acquisition before. The b/ds were owned by SunAmerica, which sold itself to AIG in 1998 for nearly $20 billion, bringing together two insurance giants. That year, the acquisition was the second largest in the American insurance industry. Today, the AIG Advisor Group is a mere blip on the revenue radar for the parent company. In 2007, the b/ds managed about $150 billion in assets and contributed $1.3 billion in revenue to the consolidated P&L statement of the parent company; the parent company raked in over $100 billion in revenue.

For the most part, the AIG Advisor Group runs its own show. Although owned by an insurance company, the heads of the b/ds say their reps are under zero pressure to sell AIG products. And, like at other independent b/ds, advisors at the AIG b/ds are allowed to manage their businesses without interference (aside from compliance procedures). That doesn't mean AIG never tried to push proprietary products. The firm was initially hoping to sell a lot of its products through the b/ds, according to Andre Cappon, CEO of the CBM Group, a Manhattan-based industry research and consulting firm. “AIG paid a giant amount of money for something they didn't know what they'd do with. It's not surprising that it wants to sell the b/ds. They're not an essential asset,” Cappon says.

There are rumors of a possible internal acquisition where Roth, the CEO of the b/ds, would attempt to purchase the b/ds with some financing help. The idea is said to have been proposed to the parent company, but nothing concrete has materialized. Before joining AIG, Roth served as managing director of Berkshire Capital, an M&A advisor in New York. According to one source familiar with the rumored insider buyout, Roth knows the right people and is ready to buy. Roth declined to speak about that possibility, but advisors at the firm like the sound of it. “I would support that sort of deal. Larry is respected and he'd be doing the advisors a service,” says one advisor who's sticking around.

It might be AIG's best bet. It is certainly a tough time to find a buyer, given the credit crunch. “A year ago, a large insurance company could have swooped in and bought us. This year, those companies are having their own difficulties and can't afford to buy anything,” says a source familiar with AIG's plans for sale. There has been concern among analysts about potenial buyers' ability to maintain adequate capital levels. A big concern for “the entire life [insurance] space right now is that commercial-real-estate-related losses will spike and erode capital positions,” says Credit Suisse analyst Thomas Gallagher, in a recent report.

MetLife is one company that is seen as a potential buyer by AIG advisors and recruiters. (Although it already owns two independent b/ds and has a variable annuity business.) But year to date, MetLife has seen its share price sink 50 percent. Lincoln National Corp. is in the same boat: It's a hefty insurance company with independent b/d subsidiaries, and its stock has plunged about 70 percent. The Hartford is suffering similarly with an 80 percent decline in its share price since January.

Finding a buyer among other independent b/ds isn't likely either — at least, not so long as the AIG b/ds are attached to the AIG variable annuity business. LPL Financial and Raymond James Financial could be natural buyers in less-tight times, say industry insiders. In fact, Raymond James — with about $800 billion in annual revenue, $1.9 trillion in shareholder equity and ownership of a commercial bank — hinted that it's seeking acquisition deals in its fourth-quarter earnings statement: “Opportunities abound for an organization that is well capitalized.” But RJ would not comment further on this statement.

As for LPL, “LPL would be a great buyer. They recently added a group of insurance b/ds, but they really have no use for the retirement services business,” says a recruiter.

And herein lies one of the problems: AIG seems intent on selling the whole retirement services unit in one go. But that's a package that potential buyers either don't have use for or can't afford in this environment. “A buyer who wants the retirement products business may not want the broker/dealers and vice versa. It makes a lot more sense to sell them separately,” says a recruiter who works with AIG reps.

SEE YA!

What's more, say recruiters, firms like LPL, Raymond James and the b/ds of Jackson National Life Insurance can expand more cheaply by picking off AIG reps one at a time. Jackson's b/d network (INVEST Financial Corporation, Investment Centers of America, National Planning Corporation, and SII Investments) is said to be among the most aggressive in recruiting AIG reps. Says Andy Silver, a spokesperson for Jackson's b/ds, “If someone is considering moving to another independent broker/dealer, regardless of where they're moving from, we want to be there. We're not targeting specific firms, but there's a natural uptick in recruiting right now because of the market volatility.”

Jackson offers an upfront bonus worth 42.5 percent of trailing 12-months' production for certain advisors who join — an astounding figure for the independent b/d world. Silver would not say how many advisors from AIG's network have joined in the last few months.

At Raymond James, recruiter Bill Van Law says calls from AIG reps went from “not frequent at all to very frequently with very strong interest.” He says it's likely the calls have increased tenfold. “The number that has actually joined is not that significant yet; it's all so recent. We're mostly in a state of heightened activity and I expect most will join in 60 to 100 days.” The story is similar at LPL where Bill Morrissey, head of recruiting, won't comment specifically on AIG, but says the number of advisors expressing interest in joining LPL was up 120 percent at the end of November compared with the same period in 2007.

The common thread among those advisors who have left since September is that most were already thinking about doing so before AIG's meltdown. “Leaving a b/d is hell,” says one Tennessee-based rep who left AIG in late September and had been shopping for b/ds since March 2008. “I don't blame advisors for holding out.”

Another AIG advisor who left recently says, “I had no desire to switch firms. We have over 1,600 client accounts and switching b/ds is like moving an entire city. It's difficult, expensive and I would have done anything to avoid it.”

FOR SALE!

Some 6,000 reps of the AIG Advisor Network are up for grabs. The b/ds are a “gem” in the independent b/d industry, according to one recruiter. Here's how they stack up to LPL and Raymond James.

# Producing Reps Average Annual Advisor Production
AIG Financial Advisors 2,799 $129,980
Royal Alliance 2,030 205,080
FSC Securities/Advantage Capital 1,444 211,690
LPL Financial* 11,089 257,400
Raymond James Financial Services 3,148 330,438
*Includes all b/d affiliates and only reps w/ LOS of 3+ years. Source: Company reports
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