November 6, 2015
By Bruce Kelly, Investment News
Ron Kruszewski says margins were lower in the wealth management group because of Sterne Agee independent advisers
Stifel Financial Corp. completed its acquisition of regional brokerage firm Sterne Agee Group Inc. in June, and now Stifel’s CEO and co-chairman Ron Kruszewski is looking for better performance out of the independent brokerage side of the business.
He made that clear in a conference call with analysts Wednesday to review the firm’s third-quarter earnings. When discussing Stifel’s global wealth management group, he said: “The margins were lower than last year due to the independent contractors from Sterne Agee, who operate at lower margins than our traditional wealth management business.”
Later in the call, in response to an analyst’s question, he added: “I think overall, and I think in the industry, independent business tends to operate at lower margins. And so we’ve been looking at, and will continue to evaluate, how the Sterne businesses fit into our overall margin analysis.”
Stifel’s target for pre-tax margins as a percentage of net revenue is 15%, according to a company presentation for investors. It exceeded that goal with margins of 15.2% in 2014, but this year has been more difficult. The company’s pre-tax margins as a percentage of net revenue were 14% for the first nine months of the year, and 12.2% for the third quarter, according to the investor presentation.
Stifel’s global wealth management brokerage revenue was $169.3 million for the quarter ended in September, a 7.5% increase compared with the third quarter of 2014 and a 6.6% increase compared with the second quarter of this year. The third quarter in general was difficult for the securities industry; from June 30 to Sept. 30, the S&P 500 declined 6.7% as fears of an economic slowdown in China sparked a broad market sell off in August.
The Stifel and Sterne Agee independent contractor group is a hodge podge, comprised of three distinct group of advisers. Before it bought Sterne Agee in June, Stifel owned Century Securities Associates Inc. Through the Sterne Agee acquisition, it added two groups of independent reps: those affiliated with Sterne Agee Financial Services Inc., and those with a firm that Sterne Agee had acquired earlier last year, WRP Investments Inc. As of June, it reported it had 736 independent contractors altogether. In contrast, it had 2,087 employee advisers, or wealth managers.
There’s no doubt Mr. Kruszewski has been busy. In June, Stifel said it was acquiring the U.S. wealth management business of Barclays Plc.
In a separate interview, Mr. Kruszewski said his objective was to have independent broker-dealer margins on par with those at industry leaders such as LPL Financial and Raymond James Financial Services Inc.
That would be a lofty goal, said Larry Papike, an industry recruiter.
Mr. Kruszewski will not “get what he’s shooting for on margins unless he raises fees or cuts payouts to advisers,” said Mr. Papike. “If that’s the case, he could lose advisers.”
Another industry recruiter, Jon Henschen, speculated whether Mr. Kruszewski’s comments on lower margins in the independent contractor business was an indication the group could be up for sale.
“Here it could make sense to sell the reps on the independent side because the margins are higher on wealth management,” said Mr. Henschen.
Mr. Kruszewski shot down the notion of cutting payouts or selling Stifel’s independent broker-dealer business. “There is no current process to sell the independent business or the Sterne Agee clearing business,” he said, adding that he has had numerous inquiries from potential buyers.
“In the majority of our deals we improve margins without impacting adviser pay,” Mr. Kruszewski said. “But I do make the infrastructure better through synergies,” he said, adding that when advisers improve their productivity, that also improves margins.
Stifel is a growth company that has completed more than a dozen acquisitions in the past decade.