March 25, 2012
by Bruce Kelly and featured in Investment News
A battle is in store for the 1,600 affiliated representatives and financial advisers at Woodbury Financial Services Inc., the independent broker-dealer that is one of the businesses that The Hartford Financial Services Group Inc. last week said it plans to sell as part of a wholesale restructuring of the company.
On one side, The Hartford and Woodbury’s management will be imploring its reps to stay put and thus preserve its asking price. On the other, rival broker-dealer firms in dire need of growth will be trying to lure them away.
A DISTRACTION TO ADVISERS
The Hartford’s announcement that it is selling the broker-dealer is “unfortunate for those [advisers] who just want to do business,” said Ernest Sampson, a former Woodbury adviser who left the firm in 2009 to launch his own broker-dealer, Private Client Services LLC.
A pending sale of a rep’s broker-dealer can be a day-to-day distraction for advisers, he and others said.
“I suspect there will be a lot of people to leave, if the phone calls we’re getting are any indication,” Mr. Sampson said. “We’ve been getting calls from some of their reps.”
Woodbury should fetch a fair sum. The Woodbury, Minn.-based firm, which traces its roots back to the founding of Montana Life in 1910, has 1,600 affiliated reps, according to data compiled by InvestmentNews. The brokerage firm produced $238.7 million in revenue in 2010.
A Hartford spokesman, Tom Hambrick, didn’t respond last week to questions about how the Woodbury reps were informed of the decision to sell the firm.
Insurance company-owned broker-dealers have struggled in recent years with record low interest rates that made many of the insurance products that they offer, such as variable annuities, difficult to sell at a healthy profit level.
In 2010, Woodbury posted a loss of $40,222, according to a filing with the Securities and Exchange Commission. In the same filing, however, it reported $49.6 million in cash.
The firm at the end of 2010 also had $24.8 million in net capital, far in excess of its requirement, according to the SEC filing. As of last Thursday, the SEC hadn’t posted the firm’s 2011 annual filing of audited financials, or its Focus report, in a readable form.
Indeed, Woodbury has many attractive qualities, one recruiter said.
“This will be a sought-after firm, and not a fire sale like we have seen over the past few years,” said Brad Fay, chief executive of IBDSearch LLC.
According to his firm’s database, Woodbury’s advisers include a large number that do recurring fee-based business: 20% are certified financial planners, more than 60% are registered to do fee-based and insurance business, and less than 10% have any reportable disclosures.
And according to Woodbury’s audited filings with the SEC, about half its revenue is recurring, which shows a strong fee-based business with commission trails, Mr. Fay said.
“That is the type of balance most independent broker-dealers strive for,” he said.
The Hartford’s announcement last Wednesday that it would jettison Woodbury and other business lines reminded industry recruiters of Ameriprise Financial Inc.’s an-nouncement last April that it would sell Securities America Inc.
Securities America was caught up in tens of millions of dollars of litigation, which it eventually settled. The legal claims were brought by investors who bought allegedly fraudulent private placement investments from the firm’s brokers.
Unlike Securities America, Woodbury didn’t sell the kinds of toxic private investments that have caused dozens of independent broker-dealers to shutter in the last couple of years. However, the waiting game that Woodbury reps will likely face could be very similar to the uncomfortable months that Securities America experienced before Ladenburg Thalmann & Co. Inc. said that it was buying the firm last August.
“Sixteen-hundred advisers woke up today and said, “I thought I was stable and solid, but I’m not,’” said Larry Papike, president of Cross-Search, a recruiting firm for independent reps and executives.
Woodbury advisers likely will be inundated with cold calls from headhunters, he said.
Some Securities America reps got eight to 15 such calls a day, a huge distraction to their business, Mr. Papike said.
There probably will be no shortage of potential buyers for Woodbury, given the recent mergers-and-acquisitions binge in the brokerage business.
Last month, insurer Western & Southern Financial Group said that it was selling the assets of its independent broker-dealer, Capital Analysts Inc., to Lincoln Investment Planning Inc.
SALE TO CETERA
And in January, insurer Genworth Financial Inc. sold its independent-broker-dealer subsidiary to Cetera Financial Group for $78.5 million, plus an earn-out provision.
As a number of insurance companies have moved to sell their independent-broker-dealer subsidiaries, private-equity funds have shown keen interest and have been active buyers, betting that size and scale will lead to greater profitability.In this case, a potential suitor could be another insurance company that shares geographic and executive links with Woodbury, said Jonathan Henschen, president of recruiting firm Henschen & Associates LLC. “Besides the private-equity firms’ being likely suitors, Allianz [Life Financial Services LLC], which is based in St. Louis Park, Minn., and is headed by former Woodbury president Walter White, is also a likely contender for Woodbury Financial,” Mr. Henschen said. That could be due to “Allianz’s desire to expand in the U.S. and Woodbury having geographical advantages on both a rep and staff level,” he said.
Sara Rollin, a spokeswoman for Allianz, declined to comment.