Another Insurer Exits the B/D Business
July 21, 2014
By Diana Britton, Wealth Management.com
Kansas City Life is selling Sunset Financial Services to Securities America
Kansas City Life Insurance Company announced the sale of its independent broker/dealer Sunset Financial Services to Securities America. Sunset has 268 reps, about $18 million in gross annual revenue, and $2.4 billion in client assets.
The terms of the deal were not disclosed. But Kansas City Life Insurance said the sale will boost the company’s assets, net of taxes and transaction expenses, by up to $2 million, or 18 cents a share. In an SEC filing, the company reported a net loss of $454,000 for 2013. The b/d’s comes primarily comes from the sale of variable life and annuity products—both proprietary and non-proprietary—as well as other fee-based products, the filing said.
The sale does not include Sunset’s b/d operations, which will continue to develop and market variable insurance products for Kansas City Life.
Sunset’s 2013 financial statement pointed to a “going concern” about a number of FINRA arbitration proceedings related to the sale of its products. In 2013, FINRA slammed the firm with a $200,000 fine for inadequate supervision over sale of a private placement. Sunset also had to pay about $84,000 in restitution to clients. Last July, the firm was fined $20,000 by FINRA for the failure to properly supervise the sale of non-traditional ETFs.
“These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern,” the SEC filing said. “If as a result of losses from litigation the Company was to fail to meet regulatory net capital requirements, it would be required to raise additional capital to continue operations. Although the Company’s parent may assist from time to time with funding for the Company, there can be no assurance that the Company will be successful in obtaining additional capital.”
“I don’t think [Sunset] really had much in the way of options,” said Jonathan Henschen, president of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn. “This would probably be the parent company tired of having to pump money into the broker/dealer and following the suit of other insurance b/ds of just focusing on their core competency—their products and distributing them to multiple b/ds and not owning their own b/d because of all the unknowns with that.”
Sunset Financial Services will be renamed KCL Service Company and operate as a branch of Securities America, which will have over 2,000 advisors once the transaction closes. Sunset clears through National Financial Services, one of Securities America’s clearing partners, so reps will have little to no repapering of client accounts.
Over the last few years, many insurance companies have been getting out of the broker/dealer business. Pacific Life divested three of its b/ds in 2007. Cetera (now owned by RCS Capital) bought three IBDs from ING in 2010, and snagged Genworth’s broker/dealer in early 2012. In February 2012, Western & Southern sold Capital Analysts to Lincoln Investment Planning, and in March of that year, The Hartford sold Woodbury Financial Services to AIG. In April 2013, Metlife sold off Tower Square and Walnut Street Securities to Cetera.
One reason behind the wave of divestitures is that it’s more difficult to distribute proprietary product, and the profit margins haven’t lived up to the insurance firms’ expectations, says Chip Roame, managing partner with Tiburon Strategic Advisors.
“This business has become increasingly challenging for smaller broker-dealers,” said Jim Nagengast, Securities America CEO and president.
“A lot of the small broker/dealers that we’re finding is they’re looking for a stronger broker/dealer partner to take over some of the technology and compliance responsibilities. What these groups want to do is focus on what they do best—which is recruiting advisors, helping advisors grow their business, and serving clients. What they don’t want to do is be managing this back-office infrastructure.”
Securities America has been on an acquisition tear for the last few years, scooping up several small broker/dealers. In addition to Sunset, the IBD purchased Dalton Strategic Investment Services in Knightstown, Ind., earlier this month, a firm with 60 advisors and $950 million in assets. Its acquisition of Eagle One Investments in Washington, Iowa, added 30 advisors in 2013, and in 2012, the IBD added Investors Security Company, with 140 advisors. In 2010, the firm bought Equitas and 40 from ePlanning, which had 45 advisors, and in 2009, it added 260 advisors with the purchase of Brecek & Young Associates from Security Benefit Corp.
The transaction is expected to close by the end of the year. Securities America plans to onboard Sunset’s advisors in the fourth quarter of this year.
