How is Independent Broker Dealer Consolidation affecting advisors?
Keeping up with the consolidation that has been taking place in the Independent Broker Dealer landscape over the past few years is literally like a full time job. Broker Dealers have been selling, merging or going out of business at an incredibly fast rate. It wasn’t until recently that firms are selling not because they are being forced to, but because the opportunity to cash out is so appealing. Many broker dealers owners simply can’t pass up the opportunity. In the past, client arbitrations, rising compliance costs, problems with products and struggling markets made the profitability at a lot of broker dealers weak. Many firms were forced to either sell or face going out of business. The environment since the end of 2012 has changed dramatically, but independent broker dealer consolidation has continued at a rapid pace.
Currently, times are good. Broker Dealers are profitable and are experiencing rising organic growth. Of the largest 75 independent broker dealers that I follow, not one faced shrinking revenue in 2013. So why are so many firms selling?
There has never been a time where multiples have been so high for broker dealer owners to sell. Many of the recent acquisitions have closed anywhere between 45%-89% of the gross dealer concessions produced by the firm. For example, a broker dealer generating $75 million in gross dealer concessions annually may receive anywhere between $34 million to $67 million if they were to sell today. These high multiples are tempting many owners to cash out. To this point, four mid-size broker dealers agreed to terms to be acquired over the past couple months alone. WRP Investments had been in business for 39 years, VSR Financial Services was founded is 1984, KMS Financial Services had been in business since 1971 and Girard Securities which was founded 29 years ago. Prior to this recent acquisition frenzy, broker dealers had been known to sell in the 25%-45% range. In 2011 Securities America sold for approximately 32% of their prior 12 months gross dealer concessions. In 2012 The Hartford sold Woodbury to AIG for approximately 35% of their prior 12 months gross dealer concessions. Similar firms could expect to receive at least double that amount in today’s environment.
How do these acquisitions affect advisors?
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