Cetera acquisition of $1.4 billion RIA clarifies urgent hire of Mike Durbin, both acquired to address 'trail revenue stream poison pill' that otherwise discourages advisors from dumping FINRA, exec says
With FINRA writing on wall, aging reps and a zero commissions trend, the Los Angeles IBD just joined Advisor Group and LPL, shifting its affiliation axis toward "corporate RIA," as economics look better than old IBD hub.
7 min read- Cetera's acquisition of TRPG signals a strategic shift towards RIA-centricity.
- Durbin's hire addresses the challenge of retaining assets from retiring IBD advisors.
- Corporate RIAs offer a solution for broker-dealers to maintain trail revenue streams.
- TRPG gains resources and independence by joining Cetera's Wealth Hub.
- Cetera aims to create a new affiliation model blending independence with support.
Brooke's Note: Back when we were starting RIABiz, broker-dealers made their first feint toward the RIA business. The emphasis was toward the oxymoronic “hybrid RIA” on the one hand, and on the other, the creation of IBD-owned RIA custody that served these undeclared fiduciary contortionists. Now, the panic is back at broker-dealers (for an enhanced set of marinated reasons) and the answer is to make an RIA into the affiliation model within the IBD itself and call it – oxymoronically -- a corporate RIA. Like the hybrid model, a corporate RIA has all the markings of a system that can scale and then collapse under its own weight. It checks some ‘RIA’ boxes, but whether you can compete in providing personal service in a low common denominator “corporate” business is less clear, especially if the market is being flooded with these things. Yet for now, it may serve a useful purpose in protecting and even growing the investments of IBD owners. Many of these private equity firms are still hooked on the dream of supercharging old insurance salesforces into gleaming wealth managers. One new spin is that aging advisors themselves are too old to want to run their own rep businesses but may be willing to stick around as RIA employees maintaining a modest book of clients.
By fits, starts and daring investments, Cetera's high-powered pivot toward RIA-centricty is beginning to look more like a strategy – albeit one shrouded by some secrecy.
It just bought its first RIA ahead of naming Mike Durbin as its consigliere. See: Cetera hiring Mike Durbin as CEO -- overseeing its existing 'CEO' -- completes Genstar's stellar HR week after it put Charles Goldman atop Orion's board -- with 'exponential' growth in mind for the 'middle market' companies
Cetera announced, June 6, that The Retirement Planning Group, LLC (TRPG) deal had closed on May 5, – 12 days before it revealed that it had hired Mike Durbin as CEO of the sub-unit that it contained.
The Los Angeles broker-dealer's chronologically jumbled and consecutive announcements reflect the unseen urgency to use an RIA to preserve assets gained through its broker-dealer.
“IBD Advisors are retiring, or having health issues, hardly news, but it is increasingly real,” says one broker-dealer executive who asked to remain anonymous to comment candidly.
“They are older than RIAs, on average, and many don't have good transition plans. So, the BD needs a solution to keep the accounts.
"Buying the BD advisor's business and giving it to a scaleable in-house solution is a win/win. The BD can often keep the trail revenue stream which is such a poison pill for many advisors trying to drop FINRA,” the source says.
Moving at speed
Durbin said in a release the firm anticipates "close collaboration as we continue to define a new affiliation model through our Wealth Hub that marries the principles of independence with the support and resources of employee services.”
A Cetera spokesperson added in an email: “TRPG ultimately chose Cetera for several reasons, including the ability to have a seat at the table, remain independent, maintain their brand and to continue to move at the speed at which they’re moving.”
TRPG CEO Kevin Conard expressed his motivation in terms of advisor and client acquisition.
Making sense of Steve Dunlap stepping into Barnaby Grist's 'big shoes' as Cetera's RIA czar
“This partnership sets us up for a bright future as we continue to attract advisors seeking to focus more on taking care of their clients and less on the operational aspects of running a business," he said in the release.
Embracing values
Though Cetera owns The Retirement Planning Group outright, it will live under its own brand – at least for now.
Statement on Conflicts “Neither our firm, nor its advisors, accepts compensation for the sale of securities through commissions, marketing or distribution fees (such as 12B-1 fees), sales charges or service fees,” the TRPG ADV2 brochure proclaims on page 8. “We believe these practices are conflicts of interest in that they create incentives for an advisor to recommend investment products based on the compensation received, rather than on the client’s needs.” |
TPRG's take on conflicts of interest and advisor compensation makes it incompatible with the Cetera brand from a regulatory standpoint.
Durbin applauds TPRG for its stance.
“We admire and embrace TRPG’s values and commitment to helping investors reach their version of financial wellbeing through all life stages,” Durbin says in the release.
Another difference for TRPG is how it partners in custody. Cetera is a Pershing shop but TRPG goes with every biggie but Pershing, according to its SEC filing.
Story Timeline
“We generally recommend that our clients use Charles Schwab & Co., Inc. (Schwab), TD Ameritrade, Inc. (TD Ameritrade), and Fidelity Investments Inc. (Fidelity), registered broker-dealers and SIPC members, as qualified custodians, we do in some instances permit the use of other custodians.”
Finding a home
Durbin, former head of Fidelity Institutional and now Cetera Holdings CEO, had a different way of expressing an assisted-living version of running an advisory practice that the 40-employee, $1.4-billion AUM firm represents.
“Disrupting the market with expanding capabilities means more flexibility for advisors," he says.
After RIA private equity hot-shot Genstar's $1.7 billion purchase of ugly duckling Cetera, Robert Moore plans to take on LPL--not with acquisitions, but a recruitment storm
"We believe advisors who are interested in spending more time with clients and less time on the operational aspects of running a business will find TRPG to be a great home.
“TRPG will play a major role in Cetera’s RIA strategy moving forward,” he writes in response to an email query.
More control
The strategy isn't exactly a novel approach, the candid executive says.
“IBDs are all experimenting with the employee model. It leads to better margins near-term (lower payout), and medium-term it sets them up for much greater scale benefit as they have more control over every aspect of the platform,” the executive explains.
Indeed, LPL bought its own OSJ, and Advisor Group hired Ed Swenson to head corporate RIA – with the idea that it can play offense and defense. See: After 13 years in the Shirl shadow, Ed Swenson gets a mandate to grow a $20-billion corporate RIA as old AIG IBD unit, Advisor Group, reorganizes and seeks new brand identit
RIAs are also getting in on the act. Mariner Holdings bought an OSJ in Sacramento that will help it grow to 5,000 advisors. See: After leap to $110 billion AUA, Marty Bicknell sets hard date for Mariner to hit 5,000 advisors predicted by wife and COO Cheryl
Focus Financial founded Connectus. See" Focus Financial launches house-brand RIA and its shares spike past $45 on scale play, but will the 70 partner firms accept the change?
Contextual thoughts
Like other big Overland Park/Leawood, Kan.RIAs [Mutual Fund Store, Mariner Holdings and Creative Planning], it already has the contours of a national RIA.
TRPG serves high-net-worth individuals, families and retirees and manages approximately $1.4 billion in assets across an estimated 1,825 client accounts with 40 employees, including 14 advisors, as of April 30.
It charges an asset-based fee that ranges to 1.65%, charges $300 per hour for planning and fixed fee rates generally begin at $1,000. TRPG has satellite offices in St. Louis and Denver.
The brokerage executive added as a contextual thought about the Durbin hire and lurch toward a Cetera affiliation gravitation toward an RIA:
“RIAs trade at much higher multiples than BDs or BD-affiliated advisors,” he writes. “So if they can move assets into the pure RIA model they will increase their own multiple (as well as the margins I mentioned in the first point). Higher margin * higher multiple makes private equity happy – though there is some risk of the RIA earnings stream being ‘tainted’ by the BD ownership.”
And, of course, when it comes to M&A, RIAs are a green pasture to be bailed and reaped.
“There are not as many IBDs left to buy,” he says. “Maybe we are in the sixth inning of BD consolidation, but only the second for RIAs. So they may want to show a future buyer that this is a platform to get into the RIA consolidation game.”
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