by Bruce Kelly and featured in Investment News
New York – Consolidation is picking up among independent-contractor broker-dealers, with three insurance companies again leading the charge to buy. Last Monday, Lincoln National Corp. of Philadelphia said that it will acquire Jefferson-Pilot Corp. of Greensboro, N.C., for $7.5 billion in cash and stock. Each company has significant independent-contractor-broker-dealer businesses. Combined, the two broker-dealers will be among the largest independent broker-dealers in the industry.
Lincoln Financial Advisors Corp. of Fort Wayne, Ind., posted $383.6 million in gross revenue in2004, and Jefferson Pilot Securities Corp. of Concord, N.H., had $137.3 million in gross revenue.Combined, the firm will have 4,680 affiliated registered representatives, with Robert W. Dineen in charge of the broker-dealer operation. David Booth, current CEO of Jefferson Pilot Securities, was leftoff an organizational chart the two companies released last week.
“The merger announcement is just the first step in the integration process,” Mr. Dineen said in an e-mail last Thursday. “We don’t expect to have any detailed information until after the close of the merger, which we anticipate happening in the first quarter of 2006. All that we can say at this point is what we’ve already acknowledged publicly: Retail distribution operations will report to me, and wholesale distribution will report to Warren May,” who will become the head of Lincoln Financial Distributors.“Mergers can work out if it’s like-minded groups with similar models,” said Jonathan Henschen, president, Henschen & Associates of Marine on St. Croix, Minn. “The problem is when you have culture clashes.” Issues over which firm’s payout structure or products to use often arise in mergers, he said. “My concern is, how are their cultures going to meld together.
Smaller firms also are in the mix. Allianz Life Insurance Co. of North America in Minneapolis is buying Questar Capital Corp. of Ann Arbor, Mich. Questar, with $33.4 million in gross revenue last year, told its affiliated registered representatives about the deal earlier this month, sources said.
In another small deal likely to be closed by the end of the month, Genworth Financial Inc. of Richmond, Va., is acquiring CJM Planning Corp. in Pompton Lakes, N.J., industry sources said. Genworth recently has tried to raise its profile in the independent-contractor broker-dealer market, changing the name of its independent broker-dealer to Genworth Financial Securities Corp. fromTerra Securities Corp. (InvestmentNews, Sept, 26).
Through the ’90s, many insurance companies bought independent-contractor broker-dealers, with some, such as American International Group Inc. of New York and ING Groep NV of Amsterdam, Netherlands, building networks of thousands of registered representatives. After the stock market peaked in 2000, however, acquisitions stalled as many firms began the painful process of consolidating operations and cutting lower-producing reps.
Go-go days again?
The typical price for an independent-contractor broker-dealer has been 30% to 50% of the firm’s annual gross revenue, observers said.
Some industry observers were not surprised at the flurry of deals this month but were hesitant to say that they marked a return to the pace of deals during the fast-moving ’90s. Over the past four years, NASD enforcement actions and rule making have strongly discouraged broker-dealers from relying on financial services products from one sponsor, one executive said.
Regardless, the motivation to acquire a broker-dealer is distribution, said the executive, who asked not to be identified. “That’s inevitable. That’s just got to be.”
Others noted that the push by NASD of Washington to regulate how broker-dealers’ reps sell insurance products such as equity index annuities might be forcing insurance companies’ hands. NASD is putting pressure on firms to mandate that affiliated reps sell equity index annuities – even though they are insurance products – through the broker-dealer.
That pressure could be enticing some insurance companies and insurance marketing companies to pair up with broker-dealers and perhaps even acquire a broker-dealer, said Tim Murphy, president of Investors Capital Corp. of Lynnfield, Mass.