Cetera deal for Avantax shows boom continues for wealth management assets

Cetera Holdings this week said it was spending $1.2 billion to acquire the nearly 3,100 tax focused financial advisors at Avantax Inc., a clear indication that the valuations for broker-dealers and registered investment advisors are still climbing and no one knows how high they will go.

To put that $1.2 billion price tag into perspective, Avantax, which was named Blucora Inc. up until it changed its name last year, in 2015 and 2019 spent $760 million to acquire two broker-dealers, the former H.D. Vest Financial Services Inc. and 1st Global Inc. Both focused on financial advisors who are tax specialists.

That translates into a 57% increase over the purchase price for the two firms, in a period of eight years. Avantax financial advisors work with about $84 billion in client assets, or roughly $27.1 million per advisor. That's at the very low end of the industry; wirehouse financial advisors on average have clients with more than $1 million each, while the average client at LPL Financial is likely to have a few hundred thousand dollars.

It's the simplest rule of thumb in the wealth management industry: the more assets per client, the greater the profit to the broker-dealer of RIA.

Regardless, industry reaction to the deal said the price made sense, particularly in a market where private equity-backed broker-dealers and RIAs are making hard charges at wealth management assets.

A spokesperson for Cetera declined to comment for this article.

"The deal is not overpriced, it’s just about right, really," said an executive at a competitor of Cetera. The executive, who asked not to be named, noted that Cetera, a giant network of 9,000 financial advisors, is owned by Genstar Capital, a private equity shop.

"And private equity sometimes values the sheer amount of assets over their worth or performance," the executive said. "Cetera is not growing organically. It has to buy firms to demonstrate growth. So, management cares more about assets."

"The price seems high for sure, but overpaying for it now has the benefit of adding to Cetera's size and scale in the future," said Jeremy Belfiore, a former senior executive at 1st Global and now the CEO of Trusted Visions Placement & Consulting, a recruiting firm.

And Cetera's future could include an initial public offering, he noted. Adding the heft of Avantax to a Cetera IPO could work to the firm's advantage if it went public.

"Cetera also bought Avantax to eliminate competition," he said, noting that one broker-dealer, Cetera Financial Specialists, also focused on Certified Public Accountants.

To be fair to Avantax and Cetera, the former is a specialty broker-dealer for CPAs, and the financial advice industry has long highly valued such financial advisors. They have unique relationships with their clients, who may be underinvested in the market.

But the boom in pricing for broker-dealers and RIAs is undeniable. Before 2015, buyers of broker-dealers typically used a valuation model based on 20% or 25% to 60% or 70% of a firms trailing 12 months revenue.

That changed when the former nontraded real estate investment trust czar Nicholas Schorsch eight-years ago bought Cetera from Lightyear Capital, paying $1.15 billion or just about 100% of Cetera's revenue from the prior year. This week, Cetera said it was paying more than what it was worth eight years ago for Avantax, which posted $666.5 million in revenue last year, according to its2022 annual report.

The price tag Cetera paid for Avantax was 180% of its revenues last year, an unthinkable sum for a broker-dealer just a few years ago.

Cetera Holdings is the parent of Cetera Financial Group, a giant network of broker-dealers with 9,000 financial advisors and $341 billion in client assets. The acquisition price is $26 per share of stock of Avantax, which has been overhauling its various business lines recently to become focused on financial advisors and the wealth management industry.

The $26 per share includes Avantax’s net debt and the purchase price represents a premium of approximately 30% to the closing price of shares of Avantax common stock at the end of last week.

Avantax had been wheeling and dealing before its sale to Cetera. Last year, it sold TaxAct, its software business, for $720 million, turning the company into a “pure play” independent broker-dealer and RIA wealth management company, it said at the time.

Financial advisors don't want to have their firms bought and sold; it can create headaches such as redoing paperwork for clients. But the Cetera and Avantax deal, regardless of the pricing, should work smoothly for the 3,100 Avantax advisors, one recruiter noted.

"Does a financial advisor want to be sold? Not necessarily," said Jodie Papike, CEO and managing principal of Cross Search. "But if they are to be sold, the best-case scenario is not having to deal with any changes."

Avantax Investment Services Inc., the broker-dealer, uses Fidelity's National Financial Services as its clearing firm, while Cetera mainly uses Pershing to clear trades for its financial advisors, she noted.

"That keeps the Avantax advisors unique and no way to be rolled up into another entity," Papike said. "That's a positive."