Hartford’s Money-Losing Brokerage Unit Expected to Attract Bids







AIG, LPL, Cetera and Ladenburg declined to comment.

The heavyweight of independent brokers is LPL Investment Holdings, which amassed 12,847 advisers partly through a series of takeovers since 2005. It is an unlikely contender, as LPL says it now prefers deals that don’t just add scale but can expand product and service capabilities, such as retirement planning or fund-manager research for very wealthy investors.

Advisor Group CEO Larry Roth at a conference this month said the firm is in talks with a few “mid-sized” broker-dealers to expand its ranks of more than 4,800 advisers.

One insurer that is still keen on the independent brokerage business is American International Group, which operates three broker-dealers through its Advisor Group unit – SagePoint Financial, Royal Alliance and FSC Securities.

Both Cetera and Ladenburg have said they would look to expand their independent brokerage businesses. Ladenburg CEO Richard Lampen in August told Reuters he intended to purchase more brokers once Securities America is digested.

Another potential suitor is Ladenburg Thalmann Financial Services, a holding company that in August bought Securities America from Ameriprise Financial for $150 million in cash. Ladenburg, which owns Triad Advisors and Investacorp, more than doubled its number of advisers and assets by adding 1,700 advisers and $50 billion in assets.

In January the firm agreed to buy a broker unit from Genworth Financial for $79 million, plus future payments. That deal added nearly 2,000 brokers and about $13 billion in assets to Cetera, which had 5,000 advisers and $75 billion in assets. Cetera last month agreed to take on all 290 brokers from Pacific West Securities Inc after that firm closed.

Among the potential Woodbury bidders, bankers said, is Cetera Financial Group, formed when private equity investor firm Lightyear Capital acquired ING Advisors Network in 2009.

“There’s no question we’re seeing the independent-brokerage industry consolidate and seeing insurers bail out of the business,” said former ING Advisors CEO John Simmers, who now runs consulting firm Pension Resources Institute.

The Compliance Department, a consulting firm that tracks broker-dealer launches and withdrawals, forecasts industry ranks will shrink by an additional 10 percent to 4,000 by 2015. Indeed, there have been a rash of deals in recent months.

Since 1999, the ranks of brokerages registered with the Financial Industry Regulatory Authority, a regulator of Wall Street brokerages, have plunged by more than 1,000, or 19 percent, to 4,435 firms mostly through mergers.

“The great thing about this business is there are real economies of scale. The costly part is developing software and building the network. Adding brokers doesn’t cost you a penny,” said Bentley Associates investment banker Timothy Hurley, who specializes in brokerage deals.

The Hartford said the sales process will last about six months, with the transaction to be completed over the following year.

That is why the unit is likely to attract bids from rival independent brokers looking to bolster their own margins by spreading overhead costs across more revenue-producing advisers, investment bankers said.

“The firm could generate profits consistent with those other broker-dealers that focus on current net income,” he wrote.

Richard Fergesen, Woodbury’s chief financial officer, in an email statement told Reuters that Hartford has managed Woodbury for “long-term value to the broader enterprise” rather than for profit. Woodbury invests in developing advisers’ practices and providing support services, which in turn provide a sales channel for Hartford’s other businesses.

On the surface, Woodbury appears a tough sell. It lost $18,000 last year after $2 million in investment losses and $252 million in expenses, according to documents filed with the Securities and Exchange Commission. Woodbury has not reported a profit since at least 2007, according to SEC filings.

Brokers employed by a traditional brokerage, such as Merrill Lynch, receive about 40 percent but office space, technology and other overhead costs are covered by the firm. Actual payouts vary by firm and the overall production of the adviser.

Woodbury was the 12th-largest independent securities brokerage with $254 million in revenue last year. Yet like its rivals, profit margins have been squeezed by technology, compliance and other costs. Independent advisers receive roughly 90 percent or more of the commissions and fees they generate, but they also are responsible for paying their own business expenses.

Last week the insurer announced it was selling its life insurance businesses to focus on property/casualty, benefits and mutual funds. Hartford also said it will seek buyers for Minnesota-based Woodbury and its 1,400 brokers who oversee $24 billion in client assets.

Hartford Financial Services Group’s independent brokerage unit Woodbury Financial Services hasn’t posted a profit for at least five years, but some investment bankers say that won’t deter a small circle of expansion-minded rivals from bidding on the business.