Standing left to right: Kirk Hulett, Senior Vice President, Strategy and Practice Management, Janine Wertheim, Senior Vice President and Chief Marketing Officer, Gregg Johnson, Senior Vice President and Director of Branch Development, Training and Support
Seated: Jim Nagengast, President and CEO, Doreen Griffith, Senior Vice President and Chief Information Officer
On November 7, 2011, Ladenburg Thalmann Financial Services Inc. said it had completed its $150 million acquisition of Securities America Financial Corp., both the broker-dealer and the RIA, which have become part of a wholly owned subsidiary.
The announcement followed a flurry of speculation and debate within industry circles throughout much of 2011 about Securities America's future, including questions about whether it would survive at all. During this period, the firm itself was mum, silenced by previous owner Ameriprise even as some reps started making well-publicized departures to rivals like LPL Financial and Commonwealth Financial Network.
What's worse is that Securities America had already come under fire for selling failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC, securities that seemed attractive at a time when financial advisors were wrestling with the problem of near-zero interest rates. These securities instead sparked litigation against their sellers, as plaintiffs said the private placements were risky, unsuitable and fraudulent, and forced dozens of broker-dealer to close or seek bankruptcy protection. Among the brokerages appearing on the obituary list was QA3, a firm started in 2000 by Securities America's founder, Stephen Wild. He had already sold Securities America in 1997 to Ameriprise, which managed to settle in 2011 with Securities America clients for about $150 million.
But what was looking like a sad final chapter for the Omaha, Neb.-based Securities America now looks instead like an open book as the Ladenburg Thalmann purchase gives the firm a new lease on life and its leaders look ahead.
Richard Lampen, the president and CEO of Ladenburg, says that when Ameriprise announced in April 2011 that it would be selling Securities America, he believed the firm would attract many suitors, and he immediately contacted James Cracchiolo, Ameriprise's chairman and CEO, as well as Securities America CEO Jim Nagengast, to express interest. "It was really a dramatic opportunity for us to take a leadership position in the industry," says Lampen.
In the early 1990s, Ladenburg Thalmann Financial Services, based in Miami, was known more for its investment banking and research capabilities. But with its recent IBD acquisitions over the last five years, including Triad Advisors Inc. and Investacorp Inc., it has positioned itself as a larger player in the independent brokerage space.
The sales process itself moved rapidly forward. After a four-month due diligence and auction process alongside numerous bidders, "We were thrilled in August when we were able to announce we were winners and had signed to secure Securities America," says Lampen.
The Securities America purchase has expanded Ladenburg's network of advisors to 2,700, and more than tripled its total client assets from $22 billion to $70 billion. The combined operations have approximately $700 million in revenues, and Ladenburg Thalmann is now the fifth or sixth largest independent B-D network.
The transaction, which closed in November 2011 and was announced publicly on November 7, has been financed by Phillip Frost, Ladenburg's principal shareholder and chairman of the board. Ladenburg purchased Securities America for $150 million up front, but Ameriprise may collect future payments in addition to the purchase price if Securities America meets some performance targets in 2012 and 2013. Nagengast, who heads his firm's senior management team, has been with Securities America since 1994, and will continue to run the company as a stand-alone business based from La Vista, Neb.
From the beginning, both Nagengast and Lampen saw their firms as a good cultural fit that promised future growth. The purchase continued Ladenburg's commitment to the independent broker-dealer business, which is thriving amid key demographic trends such as the graying of America, the retirement of the baby boomer generation, the rollover of pension assets into IRA accounts and the growing need for independent financial advice.
Nagengast, for his part, says he felt good about the fit from the outset. "As we were going through the process," he says, "I thought Ladenburg was the right firm. I knew the history. I knew the presidents at the other B-Ds. But also, I liked [Ladenburg's] commitment to the independent space-their commitment to allow us to run Securities America separately.
"We're not owned by private equity, and we're not owned by a sole proprietor or a partner where you have to worry about the future of ownership or that private equity is going to flip it in a couple of years. We're part of a publicly traded company, and we are what we are."
Ladenburg has also given advisors at the company more tools and employees more opportunity to build careers inside the firm, he says. As for why Ameriprise decided to unload the business, Nagengast surmised his ex-parent wanted "to focus on their branded channel, versus the unbranded channel. We realize that and understood the business reasons for separation, and we're frankly pleased with how it's all worked out. Under our new leadership, we will focus completely on the independent model."
Lampen adds: "This was all happening at a time when there's a steady but unalterable shift of brokers and assets from the wirehouse channel to the independent channel, including both broker-dealers and RIAs, that will probably be larger in the wirehouse channel in the next couple of years."
Lampen says the team is confident there will be steady growth in assets under management and retirement assets. "It's going to mean very vibrant growth for the independent brokerage and advisory space over the next three to four years," he says.
According to Cerulli Associates, the growth trend clearly favors the independent advisory channel. The major brokerages are expected to lose some 2,000 advisors per year through 2012, Cerulli predicts. RIA firms are the ones most likely to pick up the head count.
Ladenburg has provided Securities America with additional resources: investment banking with capital markets, proprietary investment research, advisor-friendly trust services and asset management services. Lampen says he was attracted to Securities America's practice management capabilities, technology innovations, coaching programs and strong branch culture. The firm also has a special division devoted to supporting advisors in financial institutions.
Another big factor in the purchase, Lampen says, was that Securities America's strong management team has stayed intact, and he figured Ladenburg would not have to shore up any defections from the top ranks. "We didn't lose a single member of top management," Nagengast notes. "A lot of us have been together 17 years. Outside of normal attrition, frankly, I don't think we lost hardly any employees, either."
That continuity was a major selling point, Lampen says. "It's not as if we could partner with Securities America and then parachute in a bunch of executives to run a company of that size and scale. Our whole philosophy has been doing acquisitions where there's a strong management team committed to the future and shares our views of the world.
Ladenburg plans to let Securities America continue to operate independently, promising little change for the registered representatives and advisors that have stayed on. Industry sources, by and large, view the acquisition as a positive. In late November, Chip Roame, the managing partner of Tiburon Strategic Advisors, said of the acquisition: "Securities America made up a small share of the revenues and profits of Ameriprise, a firm dominated by a semi-independent branded financial advisor force and a growing, highly profitable asset management business. Ameriprise acted appropriately in Tiburon's view. The buyer, Ladenburg Thalmann, is in a much better position to manage the business and manage the risks at its core business."
"The combination with Ladenburg Thalmann is a very good outcome for all," says Bill Crager, president of Envestnet, which provides wealth management solutions to advisors. "The deal makes sense on many levels, and should be additive to both SA and LT and their combined advisors."
Howard Diamond, the managing director and chief operating officer of Diamond Consultants in Chester, N.J., which places financial advisors nationwide, also sees the acquisition as positive. "It brought stability to the firm, and I think because [Ladenburg] acquired Securities America for a very favorable price [and] they have the ability to invest capital into the infrastructure and to build the brand," Diamond says, adding, "the Ladenburg Thalmann name is a very good name and respected in the industry."
The stock market is validating the acquisition as a positive event as well. LTC's shares jumped immediately when the sale was finalized in early November, and remained up through 2011.
According to Nagengast, the defection of reps from Securities America during the transition might have had as much to do with the crisis of 2008 as it did with the company's sale to Ladenburg.
"Yes, we lost advisors during the sale process," he says. "Anytime you put a firm through that process you're going to have some lost advisors, and we knew that going in. I can say, however, that the numbers we lost were almost exactly equal to our plan, so it was not a surprise.
"Since the announcement, however, we've had high 90% retention, Nagengast says. "I think advisors as well as industry recognize this as a great acquisition and a great deal structure, as well."
Nagengast dismissed any notion that the attrition was out of the ordinary. "The attrition we saw during the sales process was similar to what other firms have experienced when they've gone through a sales process that's made public. But since announcing the sale, we've been extremely pleased with how it's worked out, and extremely pleased with where we're headed."
Nagengast says Ameriprise has fully indemnified Ladenburg Thalmann against all Medical Capital and Provident-related matters. He would not comment directly on whether Securities America has changed its policies on private placements as a result of the scandal. "We continually review and enhance our policies and procedures to address ongoing risk management strategies and best serve our customers," he says. "We are moving forward with our business, and have put it behind us."
From the outset, Securities America adopted a business-as-usual stance at La Vista-in part to help quell the uncertainties. The CEO pledged to the troops there would be no disruption to advisor businesses, no repapering of accounts or changes to advisor systems or licenses. They would continue to use the same custodians/clearing firms. The executive teams would remain the same, with the same location, business structure and staff they had before the sale.
He also said the firm would continue to invest in programs it had initiated, like the time-segmented "NextPhase" income distribution advisor tool to ease clients' transition into retirement. Systems like this one have boosted the firm's reputation for retirement income strategies.
With Ameriprise clamping restrictions on it, Securities America largely refrained from public comment during the sales phase. "We were not going to fight our case in the press," Nagengast explained. "These are complex issues, complex situations, and we knew we would work our way through it. These are some of the things I told our employees and advisors; promises made, promises kept."
Jack F. Connealy, who owns JFC Financial Services, says he never wavered in his commitment or thought about leaving Securities America. The 107 reps in his group-a nationwide group based in Lincoln, Neb., near Omaha and concentrated in the Midwest-work largely out of community banks and are employees of the financial institutions.
"There was no inclination to leave," says Connealy, who has acted as a mentor and coach to his advisors. "There was no reason to waver from our perspective. We focused on the positives that Securities America had delivered in the past and continued throughout the entire year of 2011.
"When I joined in 2002," he continues, "we had $423 million in assets under management as a branch, and average production per employee at that time was $43,000 in gross fees and commissions. In 2011, assets under management totaled $1.64 billion, and average production per advisor was $165,000 in gross fees and commissions."
Connealy and others say they prefer the steady, down-to-earth Midwestern values and the work and service ethic of the company to the hurly-burly of more urban settings. Omaha, the home of Father Flanagan's "Boys Town," today is a hub for agra business, technology and financial service companies such as Berkshire Hathaway, Carson Wealth Management, TD Ameritrade and Mutual of Omaha.
Still, given the travails in the economy and the B-D industry itself, a key question arises: whether Ladenburg Thalmann can retain the vast majority of the new network it has bought. Nagengast says recruiting is key and the firm expects a record recruitment of new advisors in January. Securities America has also offered custom retention packages for its advisors to get them to stay and grow their business.
Diamond says it's unique for an independent broker-dealer to pay a retention package, which gives those advisors who stay a true windfall. "It's just an added bonus to those advisors who were going to remain with the firm anyways," he says. "The ones that left during the uncertainty have left already. They jumped ship. The ones that remained are more thoughtful, pragmatic and loyal.
"I'm not saying you're not going to see attrition. It's a natural occurrence, but I think for those advisors that remained, they're happy with the acquisition, and they realize that if they're going to remain independent they would be hard-pressed to find a B-D that would provide them with as high a payout and as good a platform." This will remain true, he says, as long as Ladenburg Thalmann doesn't make any significant missteps-"or monkey around with the payout payment structure."
The Road Ahead
Securities America today seems to have overcome the uncertainties associated with the sale and looks poised to gain new ground in 2012 and beyond.
Challenges remain and come with the territory. Nagengast believes dealing with the market's volatility is perhaps independent advisors' biggest challenge today, along with assuring that clients remain invested and preparing them for retirement. "That gets to the baby boomers and gets to the importance of retirement income distribution," he says.
For broker-dealers, it's the changing regulatory environment, such as Dodd-Frank, fiduciary rules and 401(k) rules. "We didn't miss a beat in 2011, and continued to bring innovative solutions to our advisors," says Janine Wertheim, Securities America's chief marketing officer.
Among them were a compliance solution for advisors using social media, a UMA program developed in partnership with Envestnet, a mobile app that allows investors to access client account information on tablets and smart phones, and a new practice transition center. "Advisors who liked us before are really going to like us now," she says.
Bruce W. Fraser, a veteran financial writer in New York, specializes in wealth management, financial planning and investment topics. He is writing a book on entrepreneurs. He may be reached at firstname.lastname@example.org His web site is www.bwfraser.com.