Sterne Agee seen continuing push in indie B-D market

The independent-contractor-brokerage industry continues to see consolidation. Last week, broker-dealer and clearing operation Sterne Agee Group Inc. agreed to buy Anderson & Strudwick Inc., a small, niche broker-dealer with 100 representatives. Some in the industry expect Sterne Agee of Birmingham, Ala., to continue its push to carve out a bigger piece of the independent-broker-dealer marketplace. Indeed, the firm this year took a shot at buying a regional clearing and brokerage rival, making an unsolicited takeover bid for SWS Group Inc. that was rejected. “Sterne Agee is an old name, an old firm. I expect they will do more,” said Tim Murphy, chief executive of Investors Capital Holdings Ltd., a holding company for independent broker-dealer Investors Capital Corp., which has 526 producing reps and financial advisers. Sterne Agee is particularly well-positioned to make money by buying broker-dealers and bringing in revenue from reps’ generation of fees and commissions, as well as by adding advisers to its clearing platform, he said. “They get two businesses for the price of one — clearing and private client,” Mr. Murphy said. Also of note, Sterne Agee raised $21.2 million from the sale of company equity in two recent private-placement offerings to wealthy investors — the first in May 2010, the other in February. Broker-dealers’ selling stock to raise cash is typically a signal of an intention to expand. And the firm last September hired Joseph Zabik, an investment banker with a deep background in the securities industry, from Banc of America Securities LLC to lead its investment-banking and corporate-development group. According to a company press release, he “has participated in numerous public and private financing and strategic advisory engagements for securities-processing companies, broker-dealers, trading platforms, exchanges, and clearing and financial outsourcing firms.” “We are trying to grow every way we can,” said Sterne Agee chief operating officer Billy Holbrook, adding that the company’s growth plans include opening new offices this summer in Midtown Manhattan for institutional and investment banking businesses, which in the future could include the private-client group. Sterne Agee is “open to any and all opportunities,” he said. When asked specifically about any potential further interest in retail broker-dealers, Mr. Holbrook said that no firm is a target right now. Although the deal is small, Sterne Agee’s acquisition of Anderson & Strudwick of Richmond, Va., which is pending regulatory approval and is expected to close near the end of the year, is the latest in a series of acquisitions in the independent-broker-dealer space. Most significantly, those deals include investment bank and independent-broker-dealer owner Ladenburg Thalmann Financial Services Inc., which said in August that it would acquire Securities America Inc.; private-equity firm Lovell Minnick Partners LLC’s acquisition of First Allied Securities, also in August; and Parthenon Capital Partners, another private-equity firm, agreeing at the end of June to purchase H.D. Vest Financial Services Inc. The acquisitions come as broker-dealer executives routinely complain about how tough it is for smaller broker-dealers to turn a profit. Margins are thin, new regulations are driving up the cost of compliance, and clients are scared of the stock market. Buyers, however, clearly are hoping for an upside, industry observers said, particularly as advisers continue their slow migration away from wirehouses to independent broker-dealers and advisory firms. And the entire industry will benefit when interest rates rise off historic lows. “We’re making nothing on cash,” said Chris Frankel, chief executive of Legent Clearing LLC and a former employee of Sterne Agee. Once a profit center for broker-dealers, spreads on client cash accounts have disappeared with declining interest rates. “Eventually, that worm will turn, and when it does, everyone will be back in the swing of things,” Mr. Frankel said. Sterne Agee’s acquisition, the terms of which were not disclosed, affects 100 Anderson & Strudwick reps. The firm’s sales force is split evenly between reps who are employees and those who are independent contractors. “I really view the deal as a fine compliment by Sterne Agee that they thought enough of what we had built to purchase” the firm, said Todd Newton, chief executive of Anderson & Strudwick until last year. “It’s a real positive. The much stronger balance sheet will benefit the financial advisers,” said Mr. Newton, who is now an independent consultant. Most of Sterne Agee’s business is institutional, and it has a large clearing firm. It has more than 400 registered reps. According to InvestmentNews’ ranking of independent broker-dealers, Sterne Agee’s independent broker-dealer, Sterne Agee Financial Services Inc., has about 250 producing reps and generated $37.1 million in gross revenue last year. Damon Joyner, chief executive of Anderson & Strudwick, will become a senior managing director at Sterne Agee. He didn’t return a phone call seeking comment. With this acquisition, Sterne Agee will expand its wealth management business in the Eastern United States, as well as in Knoxville, Tenn., and Chicago, according to a statement. Anderson & Strudwick has 18 offices in those areas. bkelly@investmentnews.com