SAI Sale to Ladenburg Mostly a Positive for Reps—Depends on Retention Packages
August, 2011
by Diana Britton and featured in RegisteredRep:
Ameriprise Financial’s (NYSE: AMP) sale of Securities America to Ladenburg Thalmann (AMEX: LTS), announced today, is mostly a positive for the firm’s rep base, industry sources said. But the size of the retention packages Ladenburg offers the reps will determine how many advisors stay. Back in late June, Registered Rep. was the first to write about Ladenburg as a potential buyer of Securities America.
Larry Papike, founder of Cross-Search, said the deal finally gives a bit of stability to SAI reps, who have been in a dicey situation for months as they waited to hear what would happen to ownership of the broker/dealer. That stability derives not only from having a clear idea finally of who their new parent company will be, but also from the fact that Ladenburg is no stranger to IBD acquisition—having purchased Triad and Investacorp in 2008 and 2007, respectively.
“Today is the first day of their new life, and I bet they’re relishing in it,” Papike said.
It also helps that Ladenburg tends to let its acquired IBDs operate independently. It will probably do the same with Securities America, said Richard Lampen, president and CEO of Ladenburg. This means little will change for the reps that stay on. It will be a “tape-to-tape” transfer, said Jonathan Henschen, a recruiter with Henschen & Associates, and the transition should be pretty seamless. SAI will remain at its La Vista, Neb. headquarters.
“Ladenburg has a track record of success with its past broker/dealer acquisitions, Investacorp and Triad, by keeping those businesses truly independent,” Lampen said, in a release.
Wednesday morning, Ladenburg announced it signed the deal to buy Securities America for $150 million up front and potential future payments if SAI reaches certain performance targets in 2012 and 2013. Financing for Ladenburg’s acquisition is being provided by an affiliate of Dr. Phillip Frost, the principal shareholder in Ladenburg and chairman of its Board, says Ladenburg.
Ameriprise decided to sell SAI in April, after being pounded by lawsuits and arbitrations over its sale of allegedly fraudulent private placements from Medical Capital Holdings and Provident Royalties. But the firm has since settled with those investors for $150 million.
Retention Packages?
The additional payments Ladenburg will pay out to Ameriprise for its purchase will likely depend heavily on whether SAI reps stay put, and this is where retention packages will be key, says Henschen. Papike agrees that if Ladenburg comes out with a robust retention package, most reps will stay, but if there’s little to no retention bonus, they will see defections.
If the firm is smart, Papike says, it will offer a retention package to rival those of other firms. He expects the package to be a combination of cash and stock, and would likely award greater amounts to those advisors with higher production. He estimated that those generating less than $200,000 in revenues will get about 5 percent, while those with over $1 million will get a 15 to 20 percent bonus.
“Retention is the wild card here and what they will do to keep them,” Henschen said.Defections?
Since the announcement of the sale in April, a number of prominent SAI advisor defections have hit the news, but exactly how many SAI reps have departed has been somewhat of a mystery over the last few months. Ameriprise did not report advisor count in its second quarter results. But Jim Nagengast, president and CEO of SAI, told Registered Rep. the firm now has about 1,700 reps with $50 billion in client assets. As of the end of the first quarter, the firm had about 1,800 reps. Nagengast said the firm now has a “robust pipeline” of potential advisors.
Sophie Schmitt, analyst with Aite Group, said some advisors at SAI were afraid the firm was going to be purchased by a larger firm, similar in size to Ameriprise, which didn’t focus much attention on the IBD unit. As a smaller parent, Ladenburg would likely be able to pay more attention to SAI’s reps. “I would think this would convince a lot of advisors to stay because of the small buyer,” she said.
Philip Palaveev, president of Fusion Advisor Network, said the fact that SAI will keep its management team intact will certainly be celebrated among its advisors. That said, some advisors may not accept the new ownership and run for the hills, while others will wait to see what the retention bonuses looks like, he added.
“They’re losing reps, and they’re going to continue to lose reps,” Henschen said. He says the firm has lost about 10 to 20 percent of its advisors, and that it could be as high as 30 to 50 percent by the end of the year. But it’s hard to tell how many have left the firm without knowing how many have been recruited over the last couple months.The SAI name is also hard for advisors to overcome with all the negative press out there, Henschen said. He believes a name change may be in order. “That name’s been dragged through gutter over the year.”
Ladenburg’s Position in the Industry
In the early ‘90s, Ladenburg was known more for its investment banking and research capabilities. But with its recent IBD acquisitions over the last five years, it has positioned itself as a large player in the retail financial services space. In fact, with the acquisition of SAI, this positions Ladenburg as one of the five largest broker/dealers, with combined revenues of $675 million, 2,700 advisors and $70 billion in total client assets.
Lampen said the firm has been articulating its goal of diversifying into the financial services space for the last five years. The firm hopes to marry the more predictable revenues of the independent broker/dealer space while also participating in the more volatile, yet higher-margin investment banking industry. Today, three-fourths of Ladenburg’s revenues come from its independent brokerage business, he said.
Nagengast said the acquisition will give SAI reps access to other parts of Ladenburg’s business, such as its trust services, investment banking capabilities, and the product management, asset management and due diligence expertise of the other two b/ds.
Aite’s Schmitt believes Ladenburg is a good match for SAI, given Ladenburg’s commitment to the independent space. It’s too bad, however, they’re not going to be consolidating the firm into one of the other b/ds because this would allow Ladenburg to achieve economies of scale. It would allow them to reduce expenses and leverage the same technology.
That said, by moving further into the retail financial services sector with the acquisition, Ladenburg can further diversify its revenue away from investment banking and take advantage of the cross-selling opportunities across its businesses, Schmitt added.
Cross-Search’s Papike said Ladenburg actually improved the reputations of Investacorp and Triad after it acquired these firms, a good sign for advisors. Jodie Papike, executive vice president at Cross-Search, said the two b/ds have had pretty low turnover. As of the end of the second quarter of this year, Triad had about 600 advisors, while Investacorp had about 400 reps. As of June 30, 2010, Triad had 571 reps, while Investacorp had 444 advisors. At the same point in 2009, Triad had 400 reps, while Investacorp had 500.
But Palaveev said he’s concerned some SAI advisors may be jumping from the frying pan to the fire because of Ladenburg’s small balance sheet. As of the second quarter of this year, the firm had $9.19 million in cash. “They can’t write a $150 million check with $9 million in cash,” he said.
Frost is covering the bill, Ladenburg said, but he’s not very well-known within the financial services industry. “This is a new character,” Palaveev said. Sources say he has deep pockets, however. It’s still unknown whether the b/d can survive a bounce in the markets and whether they will persist in the next 10 years, given its balance sheet, he added.