Cetera Financial Group and its private equity parent company Genstar announced early Monday that they have entered into a definitive agreement to acquire the assets within the independent financial planning channel of Voya Financial Advisors. Cetera’s acquisition will see 385,000 retail clients and nearly $40 billion in assets becoming a part of Cetera, as 900 independent "financial professionals" transition to the firm, according to an announcement from Voya.
WealthManagement.com first reported that the deal was imminent over the weekend.
Two groups of financial advisors—encompassing about 600—are not part of the deal and will remain at Voya, including the firm’s phone desk professionals who work with participants in its record-keeping business and its tax-exempt or “worksite” business, a group within the retirement channel that works with universities and hospitals.
The 900 Voya advisors will join Cetera Advisor Networks, the firm’s regional director model, as a large enterprise, with VFA President Tom Halloran continuing to lead the group. Cetera CEO Adam Antoniades said it will remain a separate branded organization, which they’ve yet to settle on, with the intention of keeping those advisors together. This is similar to what Cetera did with Summit Brokerage in 2019.
“We’ve had our sights set on this business for a long time,” Antoniades said. “We look for really high-quality advisors, a culture of compliance, a strong community—tight relationships among the advisors, and perhaps most importantly of all, a strong leadership to go with it and one that’s got to have a disposition towards growth.”
There will be no need for advisors to repaper client accounts; both firms use Pershing for clearing. Cetera will offer some form transition assistance to retain Voya's advisors, but Antoniades said he doesn't yet know what those packages will look like.
The firms did not disclose details of the transaction, except to say that it will provide Voya with over $300 million in deployable proceeds. The deal is expected to close in the second or third quarter of 2021.
Multiple sources in the private equity industry who have analyzed independent b/d valuations in the past 24 months noted that just before COVID-19 hit, when interest rates were higher, IBDs were selling at around 1x total annual revenues. Now, valuations remain on the higher end historically but have been subjected to downward pressure because of reduced projections from cash sweep revenues, which are linked to the interest rate environment. Valuations have dropped slightly to 0.5 to 0.7x total annual revenues.
A source within the investment banking community said the deal was not surprising, given that Cetera used to owned by ING Group, Voya’s former parent company. ING sold its three IBDs, Financial Network Investment Corporation (rebranded Cetera Advisor Networks), Multi-Financial Securities (rebranded Cetera Advisors) and PrimeVest Financial Services (rebranded Cetera Financial Institutions), to Lightyear Capital in 2009 for an undisclosed amount. Lightyear rebranded the network under the Cetera name in 2010.
Further, Cetera has a history of acquiring insurance-owned broker/dealers. At the beginning of 2012, the firm acquired Genworth’s broker/dealer, Genworth Financial Investment Services, which was later renamed Cetera Financial Specialists. In 2013, MetLife sold its IBDs Walnut Street Securities and Tower Square Securities to Cetera. Most recently, Cetera acquired the assets of Foresters Financial’s brokerage and advisory business, another insurance-based firm.
“Cetera—from the very beginning, since it was owned by Lightyear—has been a serial acquirer of insurance-owned broker/dealer and has been very effective at integrating them into whatever the proper platform is,” the source said. “So they are really good at this. I think Genstar and Cetera are really just continuing using their skillset of identifying insurance-owned broker/dealers, buying them and folding them in.”
“One of the things we like about those businesses (insurance-based b/ds), is they stand to benefit the most from some of the digital capabilities that we have, some of the tools and services that we have,” Antoniades said.
The moves have been part of a years-long pattern of insurance companies exiting the broker/dealer business.
“As [Voya has] shed their insurance products and concentrated on retirement plans, owning an independent broker/dealer has made less sense as time has gone on,” said Jonathan Henschen, president of the recruiting firm Henschen & Associates. “The independent side has been struggling to grow and they’ve incurred some hefty FINRA fines over the last few years which eroded profits substantially. It is to a point that timing a sale via private equity would make sense now, bringing the best profit potential versus waiting and risking a market decline and less assets to sell at a likely lower price.”
In 2018, Voya ran afoul of the Securities and Exchange Commission’s red flag rule, and the firm settled the charges for $1 million. In 2016, cyber intruders impersonated independent advisors in Voya’s network and called into the back office to get those advisors’ passwords reset, the SEC claimed. The intruders then used the new passwords to access personal information on 5,600 clients. They were then able to access account documents for three customers.
The SEC claims that Voya did not have the proper cybersecurity procedures in place to terminate the hackers’ access, and that the firm should have applied its procedures to its independent advisors.
Voya also paid $23 million in disgorgement and penalties under order from the SEC for alleged mutual fund share class selection violations and failing to disclose to clients conflicts related to those funds.
Jeff Nash, CEO of Bridgemark Strategies, a mergers and acquisitions and advisor transitions consulting firm, said he had predicted going into this year a lot of consolidation among proprietary-product-focused broker/dealers, due to the increased regulatory scrutiny under the SEC’s Regulation Best Interest. Take Waddell & Reed and the sale of its brokerage business to LPL Financial, for example.
“I think Reg BI makes it really difficult to have a proprietary product lineup in a broker/dealer, and I think we’re going to see more selling and more transactions happening this year as a result of that,” Nash said.
In an FAQ on Reg BI, the SEC says that if you have an advisor within a proprietary product firm that doesn’t have a Series 65, then that advisor needs to communicate with clients at point of sale that they may not have the client’s best interest in mind.
“Insurance b/ds have a lot of advisors who are just Series 6 selling insurance,” Nash said. “Now all of a sudden, that advisor has to have a disclosure that says, ‘I may not be doing what’s in your best interest,’ when they’re recommending insurance.”
There are still a number of insurance firms who own broker/dealers including Principal, AXA, Northwestern Mutual, MassMutual, Lincoln, and Minnesota Mutual (Securian), to name a few.
“It makes you wonder: Who’s next? And how many more are going to happen in this consolidation?”