Be Careful of Leveraged B-Ds Like Cetera, Advisor Group: Recruiters
April 7, 2020
By Mrinalini Krishna, Financial Advisor IQ
Moody’s has sounded the alarm about the impact of the coronavirus pandemic on the financial health of certain broker-dealers, such as Advisor Group and Cetera Financial. Recruiters are cautioning FAs about these leveraged firms because their spending ability to support the growth of advisors may be limited.
Jon Henschen, founder of St. Croix, Minn.-based recruitment firm Henschen & Associates, says he avoids recommending firms with leveraged buyout obligations to advisors because those firms are likely allocating around half their cashflow to service their debt obligations.
Both Cetera’s 2018 acquisition by PE firm Genstar Capital and Advisor Group’s 2019 buyout by PE firm Reverence Capital were financed through junk bonds.
According to a Moody’s report in June 2019, as a part of the Reverence Capital deal, Advisor Group planned to raise $1.6 billion in debt through a series of debt offerings that were rated below investment grade. Similarly in August 2018 Moody’s noted that for the Genstar deal, Aretec planned to raise $1.015 billion through three debt offerings that were also eventually junk rated.
Genstar reportedly acquired Cetera for $1.7 billion while the Reverence Capital-Advsior Group transaction came with a $2.3 billion price tag.
Henschen says debt positions are part of his due diligence reviews of broker-dealers, and Moody’s review of Advisor Group and Cetera’s parent, Aretec Group, don’t show promising prospects.
Moody’s cut its outlook for both Advisor Group and Aretec from stable to negative.
The ratings agency expects the coronavirus pandemic and market volatility to have a profound impact on the Advisor Group. Advisor Group’s acquisition of Ladenburg Thalmann expanded scale, but it also “worsened its debt leverage,” it says.
Advisor Group announced the completion of its merger with Ladenburg Thalmann in February this year, creating an entity with more than $450 billion in client assets and comprising of more than 11,300 advisors.
The pandemic, coupled with Aretec’s weak profitability and elevated debt levels with poor debt servicing capacity, also led Moody’s to change its outlook on Cetera’s holding company.
Cetera operates as an umbrella of five firms and has more than 8,000 advisors in its network. In the first seven months of 2019, the firm added more than 1,000 advisors and nearly $19.1 billion in recruited assets primarily due to the acquisition of Foresters Financial’s U.S. broker-dealer and advisory business.
Advisors should consider a firm’s ability to withstand business challenges that result from volatile markets when considering it as a potential employer, says Casey Knight, Houston-based executive vice president and managing director at recruitment firm ESP Financial Search.
“How about a firm that’s investing in growing during a time like this rather than pinching and squeezing? How about a firm that’s not leveraged off of junk bonds?” Knight says, giving examples of what advisors should evaluate.
Knight says it is worth assessing the impact of debt obligations on Advisor Group, for example.
“They’re going to cut back on resources. They’re going to not spend where maybe they would have previously. They’re going to not invest in areas that they would have invested previously. And that’s going to ultimately affect the advisors,” he says.
If both Cetera and Advisor Group spend substantially on servicing debt, Henschen says “that leaves the other half for staff salaries; a lot of it is used in recruiting and really not much of it is used in things like technology improvements.”
Both Cetera and Advisor Group tell FA-IQ they have enough resources to service advisors, however.
“Our capital structure was deliberately designed to capture the growth opportunities that arise from market disruptions,” according to a Cetera statement. “During this pandemic, we have accelerated the delivery of technology, tools and services to bolster support for advisors’ businesses, their staff and their clients, and will continue to do so.”
Advisor Group spokesman Joseph Kuo says that currently, “companies across many industries are being put on credit watch, or being downgraded, and as expected, the entire financial services sector is not immune.”
He adds: “Thankfully, we are of sufficient size and have the financial resources to continue to invest in the tools, human capital and platforms necessary to fully support our financial advisors, particularly in this period of time when their advice and counsel is needed most by their clients.”
