Big questions out there for Advisor Group

Advisor Group lost one of its biggest and most important financial advisers last week, Kevin Myeroff of Royal Alliance Associates Inc. — a regular on Barron's ranking of top independent advisers whose firm, NCA Financial Planners, has about $1.7 billion in client assets.

Sequoia Financial Group last Monday said it was buying NCA Financial Planners, Myeroff's firm. He will become a shareholder and principal at Sequoia, as well as a strategic senior advisor.

Terms of the deal were not disclosed, but it would be wise to think NCA Financial Planners was valued at at least at 15 times EBITDA, or earnings before interest, taxes, depreciation and amortization. That's the baseline when discussing valuations of registered investment advisory firms in a market for RIAs that is awash in private equity money.

Industry murmurs indicate certain bidders this year have gone as high as 18 times to 20 times EBITDA in bids for RIAs, a level of valuation that makes some wonder how the buyer will ever make his money back on the deal.

Myeroff's departure from Royal Alliance Associates Inc., one of six broker-dealers under the roof of Advisor Group, comes at a delicate time for the network, which boasts close to 10,100 advisers with more than $475 billion in client assets.

Advisor Group, which last year consolidated three smaller broker-dealers into Securities America Inc., had its annual meeting with its financial advisers in Las Vegas last month. And some advisers, along with industry observers, were left with plenty of questions following the event, according to several conversations I've had with advisers and Advisor Group watchers, including executives at rival firms, over the past couple of weeks.

Will Advisor Group become a public company? If so, when will its initial public offering likely take place? Or, will it remain private with its current and largest private equity owner, Reverence Capital Partners, selling it in a few years to another private investor?

Will it further consolidate its remaining broker-dealers? One can imagine institutional investors in a future IPO roadshow asking why Advisor Group was keeping the expense of running six separate broker-dealers.

And how much is it spending on technology, and is it enough to keep up with competitors like LPL Financial, which two years ago said it spent $150 million on tech?

Given all that context for the Advisor Group network, Myeroff will undoubtedly be missed at Royal Alliance, said one veteran adviser in the Midwest who asked not to be named. Myeroff has been registered with Royal Alliance since 1989 and the deal with Sequoia is supposed close by the end of next month.

"Myeroff is a well-respected opinion leader and if he’s leaving it’s a bellwether event and should make other Advisor Group advisers think hard about where they are and where they’re headed," the adviser said. "Kevin has always been part of the backbone of advisers at Royal Alliance."

Myeroff had nothing but praise for Advisor Group CEO Jamie Price and his team of senior brokerage managers. "I'm not running from something but going to something," he said, adding that his brother, a CPA, will also eventually work at Sequoia.

"I bleed Royal Alliance and would refer people to Advisor Group," Myeroff said.

"We thank Kevin for his support and we wish him and his team all the best going forward,” an Advisor Group spokesperson said in an email.

To be fair, big firms lose superstar advisers from time to time and manage to thrive. Ron Carson, for example, left LPL Financial for Cetera Financial Group at the start of 2017; since then, LPL's share price has more than quadrupled.

Private-equity manager Reverence Capital Partners in 2019 bought 75% of Advisor Group from Lightyear Capital, PSP Investments and other investors. A year later, Advisor Group finished its acquisition of Ladenburg Thalmann Financial Services Inc., creating a behemoth organization.

Industry analysts have noted that Advisor Group has a business model that generates cash, a relatively flexible cost base, and attractive retention rates of financial advisers. It is also suffering, like competitors, from near record-low interest rates, risks of integration of broker-dealer back-office functions, hitting profitability levels, and reducing debt.

Advisor Group shrugged off questions about any potential IPO, organization changes and technology spending in an email response.

A spokesperson said it would not comment about speculation about an IPO and that Advisor Group makes substantial investments each year in technology solutions and resources to support its financial advisers.  It also remains committed to using clearing firms Pershing and Fidelity.

“We’re very fortunate to have the support of Reverence Capital, and its strong alignment with our long-term growth strategy enables our entire organization to fully focus on growing Advisor Group over the long term, versus quarter to quarter, with an emphasis on serving our financial advisers first and foremost," the spokesperson said.

Losing a top financial adviser is always difficult for a firm, and when one leaves it always raises questions about the internal workings of a large organization like Advisor Group. There are simply not that many Kevin Myeroffs around in the industry.