The heavy debt held by these two BDs, which are owned by private equity firms, limits their options in the event of a severe market downturn and constrains their ability to serve their advisors.
MINNEAPOLIS (PRWEB) January 22, 2021
In his January 8, 2021, ThinkAdvisor article, “Advisor Group, Cetera Face Heavy Debt, Big Risks,” author Jeff Berman turns to the experts and prominently features independent broker-dealer recruiter Jon Henschen’s point of view on the risks faced by these two broker dealers.
Berman opens the article by stating that both credit rating agencies and recruiter John Henschen believe that ultra-low interest rates a challenging economy and fee compression on the financial services industry leave these advisors vulnerable. He quotes Henschen as observing, “The heavy debt held by these two broker dealers, which are owned by private equity firms limits their options in the event of a severe market downturn and constrains their ability to serve their advisors.”
The article also documents Henschen’s concern with leveraged buyouts in general and includes quotes from the author’s telephone interview with Henschen’s 2020 White Paper, “LBO Private Equity Makes it Mark in the IBD Channel” in which Henschen observes that, “There are a number of similarities between the Cetera and the Advisor Group LBO purchases and an accompanying number of risk factors for the advisors.
Per Henschen’s white paper, both the Cetera and the Advisor Group broker dealers have approximately half of their cash flow dedicated to servicing their junk bonds and the remaining cash flow is primarily dedicated to aggressive recruiting packages and continued acquisition of broker dealers. The result is potential risk to the quality of administrative service the firms provide, market volatility risk and risk from decreased costs and investments in pay technology and other areas according to Henschen’s report.
Berman’s article also shares Henschen’s analysis that, “employee morale is definitely not encouraged by moves like the pay freeze that Cetera reportedly implemented. If we have a down cycle in the market will an LBO private equity firm hold up with approximately 50% of their cash flow already designated to servicing their junk bonds? We're in a debt bubble and definitely a private equity bubble, and when these bubbles burst what happens then? They could have further downgrades. Worst case scenario as they could default on their debt,” according to Henschen.
You can download Henschen’s white paper from his website.
Jon Henschen is founder of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry sources, including WealthManagement.com, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.