Private equity firm Stone Point Capital is reportedly looking to offload Kestra Financial, the Austin-based independent broker/dealer it purchased less than three years ago. And while we may be headed for a bear market in stocks, it’s still a bull market for IBDs, industry observers say, especially for firms like Kestra.
A couple years ago, there was a lot of noise around diminished demand for independent broker/dealers, especially as the Department of Labor’s fiduciary rule was set to take effect. Now that there’s less regulatory uncertainty, firms are focusing more on the future, with a bullish view.
“Contrary to speculation a number of years ago, the independent broker/dealers are not going to be extinct,” said Matt Lynch, managing partner of Strategy & Resources, a consulting firm. “They’re reinventing themselves. A high percentage of them created compelling service models in addition to just being a broker/dealer.”
Many firms believe there’s a long-term opportunity in the segment and are investing in upgrading their capabilities, including practice management tools, technology, marketing support and investment advisory functions.
For example, in November, Advisor Group introduced new technology to equip the four independent firms in its network with digital client onboarding and account management. Commonwealth Financial Network recently partnered with RightCapital to bring the company’s financial planning program to the IBD’s 1,800 advisors. And most recently, LPL shelled out $28 million to acquire AdvisoryWorld, a proposal generation, client onboarding and investment analytics company.
“When you describe the IBDs, we’re really describing what are in many cases hybrid firms that do a number of things, and by doing so, they continue to remain relevant to the end advisor,” Lynch said.
“The wealth management side of the ledger is still very attractive,” said Scott Smith, director of advice relationships at Cerulli Associates. “All the signs that we see from Cerulli’s perspective are not about disintermediation and disruption, but people actually wanting more advice. So the wealth management providers are in a position to excel at this.”
Hybrid IBDs, those that service dually-registered advisors, have long been considered a stopover point on the way to pure independence. But a recent Cerulli report finds that more advisors are considering the channel a permanent home.
“We’ve always kind of taken the dramatic approach—it’s a weigh station on the way to independence,” Smith said.
“The appeal of commissionable product access can’t be underestimated, even in a fee-based environment,” said Marina Shtyrkov, a research analyst at Cerulli.
“A lot of financial advisors that are going to be contemplating succession or retirement in the coming years still have a significant broker/dealer-related business, and they’re not just going to flip that switch off,” Lynch said. “There’s usually a fair amount of value in their business that’s associated with the accounts that exist at the broker/dealer.”
Kestra, in particular, has a profitable business, said Jonathan Henschen, president of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn. The average production per rep has consistently been over $400,000, and the firm has a healthy product mix, with a lot of advisory business held inside brokerage accounts. The firm has also had a lot of success with recruiting, both from other independents as well as wirehouses via its private wealth services. Kestra Private Wealth Services is a division of the independent broker/dealer that helps wirehouse advisors go independent, providing office logistics assistance, consultative compliance support, a comprehensive platform, a transition plan and daily management support.
Stone Point could be looking to offload the firm before a potential bear market hits and firm valuations decline, Henschen says. “[Stone Point] probably wants to get out sooner rather than later because prices could continue to erode. It’ll be a tough time for them to pull a profit in an industry like ours that is so dependent on stock prices.”
But Lynch cautions against buying and selling broker/dealers based on underlying market fundamentals; that’s risky. Rather, IBDs should be a viewed as a long-term hold.
“I wonder about whether private equity is a significant player going forward in this sense,” Lynch said. “Firms that believe they’re going to go in and buy into the IBD space and hold onto it for three to five years and then turn it, I’m not sure that those are the firms that are going to drive innovation, and are going to be the influencers in the space.”
Henschen hopes, for advisors’ sake, that Kestra is sold to a longer-term player, such as Ladenburg Thalmann.
“These sales bring out unknowns. It could be a non-event, which is what you hope for, or it could be something that goes bad over time.”