Cetera Financial Group is developing an equity participation plan for its reps in the wake of receiving a majority equity investment from Genstar Capital, according to Cetera CEO Robert "RJ" Moore.
Although the plan is still being formulated, Moore said Cetera and Genstar were looking to devise a plan that would allow advisors affiliated with Cetera to acquire major equity positions in the independent broker-dealer (IBD) network.
Last week, Cetera announced that it had completed a review of its strategic options by selecting Genstar as its lead equity investor. Moore declined to comment on reports that the Genstar investment valued Cetera at a lofty $1.7 billion.
However, he did say that Genstar emerged as the clear favorite because it was willing to commit long-term strategic capital to the IBD network. The fund that Genstar used to invest in Cetera has a 12-year time horizon. Most private equity funds have five- to seven-year horizons, after which they seek to exit their investments.
Equity participation among Cetera reps would “truly align our interests” with advisors and clients, Moore contended. He added that client-advisor alignment was emerging as a “hallmark of change” as the brokerage industry tries to transform itself into a profession.
Initially, Cetera and Genstar will be formulating ways to give reps access to equity. Over time, they want to establish a more “programmatic system” for all reps, not just high-performers. When Cetera was owned by Lightyear Capital from 2010 to 2014, some reps had options and profited handsomely when the firm was sold to Realty Capital for $1.1 billion.
Moore believes the IBD universe can no longer rely on wirehouse training programs as a source of new entrants to the IBD world. Cetera has rolled out new programs to recruit women and military personnel to grow its business.
Cetera has no plans to offer so-called “retention bonuses” to its rep network. Moore indicated this practice, which is increasingly controversial, typically is employed when a rep has to switch firms and often clearing partners, requiring arduous account transfers. The Genstar investment required none of these tasks.
Some wirehouses have indicated they are dropping upfront recruiting bonuses, forgiveable loans and other practices. Regulators have often frowned upon these payments and some have even toyed with the idea of forcing brokers to disclose the payments to their clients.
There are other factors beyond the appearances of conflicts of interest working against these practices. The payments can be expensive and send mixed messages to existing reps who remain loyal to a brokerage firm. Moreover, some compliance consultants like Sander Ressler think these loans and bonuses can go too far.