Cetera warns broker that M&A deals require its approval

14:13 29 March in In the News by rafferty

March 27, 2023

Cetera Financial Group is telling its thousands of independent brokers that any sales of their own businesses must be approved by the corporate compliance office.

Not doing so could lead to potential FINRA enforcement cases, according to the message sent last fall by the Los Angeles-based wealth management firm’s compliance division. Financial Planning obtained a copy of the email blast, which has not been previously reported.

The message, marked “confidential,” could come as a harsh warning to any financial advisor who may seek to take assets off Cetera’s platforms when tapping into the ongoing massive M&A transactions across the industry or finding a succession partner. The correspondence carries major implications for independent brokers, who have in many cases left wirehouses in order to operate their own businesses more with more flexibility and less burdensome oversight.

The message displays how independent wealth management firms that employ advisors as 1099 contractors rather than direct W-2 staff sometimes take stances that restrict brokers’ choices about their own businesses. Many advisors buy other planners’ firms as well, so the warning could apply to brokers acquiring other businesses, too.

“In recent weeks, many advisors have been receiving solicitations from professional investors seeking to acquire a full or partial interest in the advisor’s practice,” according to the email from Cetera’s compliance unit. “Please note, depending on the nature of the transaction, it will likely be deemed to be a private securities transaction (PST) and/or an outside business activity (OBA), which requires prior approval by your broker-dealer compliance department.

“Unapproved PSTs are often deemed a ‘selling away’ violation by regulators and can lead to material challenges going forward,” the email continued. “FINRA has suspended, fined or even barred registered representatives for entering into PSTs or having OBAs without first notifying their firm and gaining approval. Please direct any questions you may have to your Compliance Department at [email address].”

Bad actors typically use outside entities to carry out fraud or other harmful conduct. While FINRA often presses regulatory cases involving undisclosed or unapproved outside business activities, it’s not clear whether it has ever filed a proceeding based solely on a broker who sold their own company to an outside firm in an M&A deal.

Cetera’s email blast reflects “a growing movement of restricting advisors’ independence and freedoms at broker-dealers,” according to recruiter Jon Henschen of Henschen & Associates.

Other examples include brokerages that buy advisory practices for themselves, place barriers to transferring client accounts when advisors change firms and seek to hang on to some customers by casting aspersions on a broker who leaves for another company. Henschen is especially critical of firms like Cetera that are owned by private equity firms.

“Perhaps driven by [leveraged buyout] PE, the industry is getting less friendly to an advisor being able to just up and leave if they choose to,” Henschen said in an email. “Wanting a more predictable revenue flow is an obvious motive. Wirehouses have countered turnover by converting to teams, which makes a move much more difficult because it is harder to get consensus to move from many advisors versus one or two.”