If you’re sitting at an insurance-owned independent broker/dealer, you may want to reconsider. MetLife’s recent move to sell IBDs Walnut Street Securities and Tower Square Securities to Cetera, announced Friday, is just the latest sign that insurance firms are not in the independent broker/dealer business for the long haul.
“The pattern gets increasingly clear that the insurance companies don’t want to have broker/dealers anymore,” said Jonathan Henschen, president of the recruiting  firm Henschen & Associates in Marine on St. Croix, Minn. “If I was a rep looking to change b/ds, considering insurance broker/dealer, I think I’d be concerned, ‘Hey, how soon are they going to be sold?’”
Once the deal with MetLife is completed, Cetera will go from about $105 billion in assets and 6,500 advisors to over $130 billion in assets and 7,000 advisors.
The current sell cycle that insurance firms  are in has been going on for a while. Pacific Life divested three of its b/ds in 2007. In 2010, Cetera bought three IBDs from ING, and snagged Genworth’s broker/dealer last year. In February of last year, Western & Southern sold Capital Analysts to Lincoln Investment Planning, and last July, The Hartford announced it was selling Woodbury Financial Services to AIG Advisor Group.
Insurance firms are very conservative, and don’t want to take a lot of risks, said consultant Tim Welsh of Nexus Strategy in Larkspur, Calif. That message will probably be seen by people at other insurance b/ds, as they see competitors exit the business. These divestitures are only going to continue, he said.
“The writing’s on the wall,” Welsh said. “It’s not a matter of yes or no; it’s just a matter of when.”
Mixing Manufacturing and Distribution
Traditionally insurance firms wanted broker/dealer subsidiaries as ready-made distribution arms for their proprietary products, said Henschen. It didn’t matter so much if the b/d lost money because they could get 15 percent returns on the sales.
“What [insurance firms are] finding is that being a broker/dealer is hard,” Welsh said. “The costs are increasing, compliance is going up everywhere, your allies—which used to the mutual funds—are having a hard time doing shelf space payments, 12b-1 fees are under attack. It’s not as profitable as I’m sure they thought.”
It’s also getting harder, or less reputable, to push products, even covertly, with financial advisors increasingly interested in running their practices independently and a possible fiduciary standard for all advisors on the table. Open architecture is more important than ever, Welsh said.
“All of these fundamental, cash-cow products and distribution channels fundamentally have not worked for these big insurance companies.”
The separation of manufacturing and distribution has been a long-term trend in financial services, Welsh added. In 2006, Merrill Lynch sold its asset management unit to BlackRock. In 2005, Smith Barney’s asset management unit was sold to Legg Mason.
In MetLife’s situation, however, the firm is only selling two of its four b/ds. New England Securities and MetLife Securities, the firm’s affiliated b/d, will remain with the company. But advisors at those two firms operate more as captive insurance agents and likely sold more of MetLife’s proprietary insurance products, said Jodie Papike, executive vice president at Cross-Search. Advisors at the firms they’re getting rid of—Tower Square and Walnut—are independent contractors, who are securities-focused and likely didn’t sell as much insurance.
Is the Grass Greener?
“The biggest question mark for advisors [at Tower Square and Walnut] is going to be, ‘How much change is coming to me through this acquisition? And if it is a lot of change coming to me, is it worth it for me to go out and see what my other options are?’” Papike said.
Papike believes the technology that’s going to be offered to these advisors at Cetera will be better than what they’ve had in the past.
Henschen said he’s been impressed by Cetera’s technology platform and culture; even though the firm has gotten big over the last couple years, they’re still flexible in what they allow advisors to do. In addition, their b/ds aren’t redundant; each one serves a different niche of advisors. Cetera Advisor Networks has a regional director structure, which is designed to offer more support and help advisors grow their book. Cetera Advisors is the true independent b/d; Cetera Financial Institutions is the bank channel; and Cetera Financial Specialists is the CPA channel.
“Those all complement each other and their not redundant,” Henschen said.
The two MetLife b/ds will merge with Cetera Advisor Networks, said Doug King, president and CEO of Cetera Advisor Networks. Tower Square and Walnut have a branch structure, with managing partners, which is a similar team-oriented environment to Cetera Advisor Networks. All three clear through Pershing, so advisors can expect “minimal” repapering of client accounts, King said.
Valerie Brown, CEO of Cetera, said they go on a three-week roadshow to sit down with the MetLife b/ds’ advisors and branches to help them understand the transition. Retention packages will be part of that discussion, although the firm will not make details public.
As far as the firms’ back-office employees, Brown said Cetera will make offers to “dedicated associates” at Walnut and Tower Square to join, but they will also need to add employees in Cetera’s Los Angeles and Des Moines, Iowa, offices. “There will be change; there’s no way you can say there won’t be change,” she said.