Sources estimate that if the Advisor Group were to acquire Cetera, it could knock out as much as $75 million in annual operating expenses. Giant LPL probably could eliminate $100 million or even $150 million, sources familiar with both firms’ operations say.
But if LPL were serious about acquiring Cetera, as many think, it’s hard to see why they would be targeting Cetera’s rep network. During the Schorsch-inflicted bankruptcy, LPL and other firms all circled the Cetera B-Ds. Many of their reps were understandably looking to jump ship. Under the leadership of first Larry Roth and then Robert Moore, however, Cetera managed to emerge from bankruptcy, a rare feat in the brokerage business.
More recently, some Cetera reps have voiced vociferous opposition to the possibility of an LPL acquisition.
But there is a larger question. Why would LPL be “expending so much time, energy and money to poach Cetera’s top advisors if it was really the front-runner to acquire the firm?” one recruiter asked. Cynics suggest LPL might want to scare other potential suitors away so it could buy Cetera at a bargain price. However, those who know LPL say it is far too disciplined an organization to engage in wild-man tactics.
Others wonder if this recruiting strategy inadvertently tips LPL’s hand and signals it would prefer to acquire the Advisor Group from Lightyear. There is no evidence the two parties have even talked, but the Advisor Group offers some attractive assets.
It has, for instance, a lean management team at the top level and a strong technology infrastructure to support an expanding advisory services operation. So, in a merger there would be much less overhead. LPL might need to pick up some management talent and badly needed back office support if it plans to continue to grow. When Advisor Group was owned by AIG in the early 2000 period, Mark Goldberg, then the CEO of its Royal Alliance unit, was credited with building an excellent platform for hybrid RIAs to use for its advisory operations.
Of course, there are other reasons that Advisor Group might be a more attractive acquisition for LPL than Cetera. According to Financial Advisor’s April broker-dealer survey, Advisor Group’s four broker-dealers generate about $1.4 billion in revenues while Cetera generates $1.76 billion. But most Advisor Group firms have a stronger tilt toward advice and asset management, the high-growth parts of the business. Moreover, the original four Cetera firms that Marron sold to Schorsch are viewed as having higher-quality reps from a revenue-per-rep and a compliance standpoint than the ones Schorsch bought on his frenzied acquisition binge.
Then there’s the simple math. Were Advisor Group to merge with Cetera, the emerging entity would have just under $3.2 billion in sales, making it the third-largest player in the IBD space behind LPL and Ameriprise, whose $4.26 billion in revenues are only $20 million less than LPL’s $4.28 billion.
If LPL purchased Advisor Group, the combination would have $5.7 billion in revenue and would solidify LPL’s position as the nation’s largest independent. Of course, a Cetera acquisition by LPL would put it over $6 billion in revenues, though the assets might be somewhat less attractive.
However, as LPL discovered with the NPH transaction, any acquistion is likely to cause serious breakage. Some Advisor Group reps are fiercely loyal to their four different B-Ds, Royal Alliance, Sage Point Financial, FSC Securities and Woodbury Securities. Forcing them or reps from Cetera's six B-Ds, for that matter, all to move under the LPL umbrella will inevitably result in attrition. But from the way the stock market has reacted to the LPL-NPH deal, the costs are well worth it.