Will LPL or Lightyear buy Cetera? Either way, proceed with caution

When I attend industry events and conferences, there’s one company whose name seems to be on everyone’s lips: Cetera. Executives and staff have not been too shy about discussing the possibility of a sale to another company such as LPL Financial or Lightyear Capital. The need for internal restructuring has also come up in conversation. As a longtime industry recruiter, I feel like Pandora’s box has been opened.

First, consider Cetera’s recent and aggressive recruiting package. Industry sources tell me Cetera is offering recruits an enhanced bonus that would match their transition deal if a change in ownership were to occur over the next three years. That means a recruit producing $500,000 with a 30% to 40% deal would reap another 30% to 40% if Cetera were to sell to another company. The end result has the new firm carrying at least a 60% note on new recruits. That is a losing deal for whoever takes over.

In the case of a potential sale to LPL, the cloud hanging over the recent National Planning Holdings acquisition certainly casts a long shadow. If LPL were to acquire Cetera, it would likely be obligated to fulfill the fiscal obligations of Cetera’s recruiting deals, which would no doubt draw comparisons to deals offered to NPH advisors. LPL offered bonuses on a scale from zero for advisors generating less than $100,000 to 30% or more for advisors producing $3 million.

And growing fast is not necessarily progress. Some LPL advisors have complained about a deteriorating culture among existing employees who have seen their level of service rapidly decline due to the buying spree. Plus, the deals offered by LPL to transitioning NPH advisors — whose total retention fell short of expectations — are not even close to the financial benefits being offered to Cetera advisors. The looming clouds mounting around the largest independent broker-dealer network could become a tornado of discontent.

Then, there’s the highly publicized pushback from Cetera’s largest advisory groups about a LPL sale. The most notable being Ron Carson, who plainly stated in an open letter to his 48-practice groups that his firm will not stick around after an LPL acquisition. (Carson’s letter was particularly noteworthy given his 28-year tenure at LPL Financial, which came to end just over a year ago.)

It seems safe to assume an LPL acquisition would result in a mass exodus. Cetera advisors joined the company from LPL seeking a more independent environment with fewer compliance restrictions. An LPL sale would be an unwelcome trip back home.

Which takes us to Cetera’s post-bankruptcy era. More than a few private equity firms injected money into Cetera as debt investors, and were ultimately converted to equity investors after parent firm RCAP filed for bankruptcy. I’m told by Cetera insiders that these entities — many of which are from a more conservative, fixed-income mindset — have been actively lobbying for a way out of what they feel is a Cetera quagmire that does not reflect the original intent of their investment.

This leads us to the scenario where, in my opinion, almost all the indicators seem to be pointing: a necessary debt restructuring. A debt restructure for Cetera would be no more complicated than a person with bad credit going back to the bank for a mortgage refinance after their credit improves. What’s more, a debt restructuring has the potential to save Cetera an estimated $20 to $30 million in finance carrying costs, experts have told me. This much-needed cash flow would certainly support the new ramp-up in Cetera recruiting and leave funds available for even more investment in technology.

And so, consider if Lightyear were to enter into the Cetera mix. Lightyear has the internal structure, cultural similarities and technological compatibility to serve as the catalyst for a debt restructure at Cetera, all while offering PE investors the ability to exit by taking their debt out with cash. This is a huge boon when you consider the current position of these investors. (Lightyear had previously been an owner of Cetera before selling it to RCAP for $1.15 billion in April 2014.)

What would be in it for Lightyear? The private equity firm has substantial ownership interest in Advisor Group, which brings with it the ability to potentially consolidate Advisor Group firms such as Royal Alliance, SagePoint, FSC or Woodbury with Cetera Group firms like Cetera Advisors, Cetera Advisor Networks, First Allied Securities or Summit Brokerage. The opportunities in this case are particularly attractive given the close similarities. Lightyear would benefit from cost savings by matching divisions based on scale, service models and geographic similarities, while using the new Cetera technology platform built over the Pershing system as the common thread.

Both Cetera and Lightyear would also benefit by consolidating assets with their existing Pershing relationship. No doubt, this new scale would give them more buying power and lead to a renegotiation of custody and clearing services charges.

Whichever path Cetera chooses for its future, in consideration of all of these scenarios, one thing is certain: advance with caution. Cetera should consider its battle-weary advisors who have performed well despite the ups and downs of a bankruptcy.

Restructuring is necessary. But if Cetera caves to the temptations of culturally unmatched firms or too much consolidation, the roadblocks they create for themselves may be too much to overcome.