Cetera Financial Group announced plans Monday to acquire Genworth Financial’s broker/dealer, Genworth Financial Investment Services (GFIS), expanding its network of broker/dealers. The move will add around 1,800 financial advisors who focus on tax and accounting services to the 5,000 already divided between Cetera’s three broker/dealers Multi-Financial , Financial Network and PrimeVest Financial. The GFIS acquisition is expected to close in 90 days.
According to Genworth Financial’s web site, Cetera Financial paid $78.5 million for the broker-dealer. There is also an earnout provision based on the broker-dealer hitting revenue goals over a one-year period. Genworth expects to record a $15 million after-tax gain related to the sale of the broker-dealer.
Cetera is in growth mode. Last month, the firm's Multi-Financial announced a recruiting deal to bring over the advisors from Pacific West Financial Group. And it has made it known that it was interested in acquisitions from the start. The firm was created in November 2009, when private equity firm Lightyear Capital announced plans to purchase ING's three broker/dealers and rename them Cetera Financial Group.
The deal gives Cetera critical scale in a tight-margin environment with rising regulatory costs and allows the broker/dealer to diversify its businesses mix. “In this marketplace, tough markets, low interest rates, and higher regulatory costs every day, scale is critical to being able to have the financial wherewithal to continue to invest,” said Valerie Brown, CEO of Cetera, in an interview.
There are synergies, too. The two firms have similar back-office platforms; both clear through Pershing. In addition, GFIS’s reps tend to develop fee-based relationships with their clients, something that’s been a big focus of Cetera, Brown said. GFIS has about $13 billion in total assets, including $4 billion fee-based assets. As of the third quarter of 2011, Cetera had $75 billion in total assets, including $15 billion in advisory assets, Brown said.
Enrique Vasquez, president and CEO of GFIS, will stay on as head of the fourth b/d, which will be renamed in the coming months. Though mergers of b/ds often result in FA departures, Vasquez said he does not expect any defections; in fact, he expects the news to attract new advisors to GFIS because of Cetera’s broader platform and scale.
Focus on Tax, Accounting
For Cetera, the deal nicely rounds out its selection of broker/dealers, said Jonathan Henschen, president of recruiting firm Henschen & Associates, Henschen. PrimeVest is known for catering to bank and credit union advisors, while Financial Network is known for training new people moving into the industry. Multi-Financial is geared towards those advisors who have their practice down, but want an intimate relationship with the home office. Henschen said the downside with CPAs and tax preparers is that their average production tends to be pretty low. According to Genworth average production per advisor is $55,000.
“This is common for CPAs who are reps as well,” said Chip Roame, managing partner with Tiburon Strategic Advisors. “Everyone likes the CPA story though; the chance to be the trusted quarterback of clients' needs.”
CPA advisors typically have a fantastic client base that can be easily converted into wealth management clients, said Philip Palaveev, president of Elmsford, N.Y.-based Fusion Advisor Network. This niche has been a recognized niche in broker/dealer services for a long time. Other broker/dealers known to focus on this niche include H.D. Vest and 1st Global.
Meanwhile, Genworth gets rid of a non-core asset, according to Palaveev and Roame, as the parent company is more focused on manufacturing annuities and third party asset management units.
“Genworth has a thriving AUM, relatively high margin, business (old Asset Mark),” Roame said. “This allows their management team to concentrate on such. Their model is to sell their services through many third-party channels. Owning one of those channels could be a conflict and it was certainly likely a distraction, with lower margins and more risk.”
Next Steps
Building assets and headcount may also be steps on the road to self-clearing, said Scott Miller and Scott Collins of FirstPoint Partners in San Diego, Calif.. Self-clearing requires great scale. Another sign that self-custody is in the firm's future, according to Collins: it recently announced it would bring its IRA custodial business in-house from Pershing.
Is an IPO in the cards? Valerie Brown said the firm has no plans to go public as of now, but many observers think there will be an IPO down the line, including Henschen, Palaveev and Srini Venkateswaran, partner in Booz & Company’s wealth and asset management practice.