Broker-dealers without big corporate parents or the ability to tap public markets are making an all-out effort to raise capital, in some cases turning to their own clients for financing.
For example, the holding company for
American Portfolios Financial Services Inc., a fast-growing independent broker-dealer, is closing a $10 million private debt offering this month; it has so far raised $9.1 million. The firm's brokers were asked to sell the firm's five-year, 8% notes to their wealthy clients.
In April, the former ING Groep NV broker-dealers, now dubbed Cetera Financial Holdings, raised $10.2 million in an equity offering.
The American Portfolios and Cetera offerings required minimum investments of $25,000.
Broker-dealers need capital for recruiting and expansion, as well as to meet costs associated with regulation.
“To recruit, broker-dealers need a strong balance sheet,” said Steven Insel, an attorney who represents about 15 dually registered independent broker-dealers and advisory firms, and has advised on a number of mergers and acquisitions. “Plus, firms face a significant cost to implement regulatory changes facing broker-dealers that have advisory businesses.”
“If a broker-dealer is not attached to a large financial institution, it's going to have to raise capital,” Mr. Insel said.
The most prominent capital-raising effort in the independent-broker-dealer industry, of course, is the pending initial public offering for LPL Investment Holdings Inc., which registered for an IPO in June.
Having sufficient capital to expand, and recruit reps and advisers, is one piece of the big picture that is forming for the entire independent-broker-dealer industry, said Jay Nagdeman, president of Suasion Resources Inc., a marketing consultant.
“The segmentation between firms is increasing,” with some firms able to take advantage of the dramatic marketplace changes over the past two years by recruiting reps and others that can't, he said. “There are firms obviously looking at survival.”
Regulators at the Financial Industry Regulatory Authority Inc. in the past have warned their broker-dealer members that such deals run the chance of raising red flags. In 2004, GunnAllen Holdings Inc. sold about $8 million of private notes. The company is the parent of GunnAllen Financial Inc., which filed for bankruptcy protection in April. The status of the noteholders in the bankruptcy proceedings is unclear.
“The offering of securities by a member firm or a control entity of the firm in a private placement raises conflicts of interest and has been an area of regulatory concern in recent years,” Finra said in a notice to members in June 2009. That's when Finra introduced a rule that focused on disclosure, filing requirements and limitations of the use of proceeds for the offering, and capping commissions at 15%.
But Nancy Condon, a Finra spokeswoman, said the regulator has not seen an increase involving unfair discovery practices. She added that "parties can always take their issues directly to the arbitrators and arbitrators can refer cases to enforcement."
A spokeswoman for Cetera, Carol Graumann, would not disclose how the money from the private self-offering will be used. She added that the Regulation D offering was made in accordance with federal securities laws.
The main purpose for the American Portfolios self-offering was to continue to expand the firm, and invest in recruiting and technology, said Lon Dolber, the largest shareholder and chief executive of American Portfolios Holdings.
The company's broker-dealer, American Portfolios Financial Services Inc., has grown significantly over the past few years. In January, it had 647 affiliated representatives, compared with 399 three years earlier. Gross revenue, however, has fluctuated with the market, rising to $70.6 million in 2008, from $51.2 million in 2006, and then falling back to $66.3 million last year, according to
InvestmentNews data.
(Click here for the firm's 2010 profile.
Not all the firm's advisers have embraced what became the company's third self-offering, Mr. Dolber said. “The reps were somewhat resistant. The market's not been great, and there has been negativity about private placements.”
The firm and its brokers earned $400,00 in commissions from the financing, meaning the commission rate was close to 4%, and 172 investors bought the debt, according to a July filing with the Securities and Exchange Commission. A sinking fund will be created to pay back portions of the debt over time, Mr. Dolber said.
In the Cetera deal, 115 investors bought equity, according to an SEC filing made by the company, a broker-dealer network owned by Lightyear Capital LLC, which is headed by Donald Marron, the former chairman and chief executive of PaineWebber Group Inc. Terms of that acquisition were not disclosed, but the three broker-dealers that make up Cetera — Financial Network Investment Corp., Multi-Financial Securities Corp. and PrimeVest Financial Services Inc. — had a combined 4,841 reps and advisers, and approximately $75 billion of assets under administration, at the end of last year.
E-mail Bruce Kelly at bkelly@investmentnews.com.
