A group of nearly 6,000 financial advisors and other wealth management professionals attended the 2023 ConnectED conference virtually or in-person last week in Phoenix, the location of Osaic’s headquarters. As the No. 3 independent brokerage in Financial Planning’s IBD Elite rankings with $4.23 billion in annual revenue, the private equity-backed firm is seeking to retain and recruit advisors over pouncing competitors, keep its fiscal situation stable and manage new and pending regulations that could affect its business.
Osaic took the opportunity of the large gathering to share some of its answers to the challenges facing the firm and its rivals. CEO Jamie Price called on the Securities and Exchange Commission to slow down the pace and number of new rules and halt regulatory cases often bemoaned by the industry as “regulation by enforcement.” The firm also repeated its pattern in recent years of streamlining certain fees and unveiling the changes at the conference. At the event, Osaic President of Advice and Wealth Management Greg Cornick said that ticket charges and wrap advisory fees in advisor-managed portfolios will be lower and simpler starting in April.
That adjustment “was the first step” as Osaic considers other shifts in fees, payout rates and cybersecurity expenses for the future, Cornick said in an interview after the conference.
“Based on feedback we received from advisors and from the marketplace, this was the one at the top of the list and we went at it first to get it out,” he said. “When we announced it at ConnectED, the reaction as you can imagine was positive. The advisors liked that it was easier to understand and cheaper.”
For the ticket rate on transactions and the price of using its wrap advisory accounts, Osaic slashed fees into standardized amounts based on assets managed by advisors using the firm’s platforms:
- $50 million – $100 million: ticket charge 7 basis points; wrap 14 bps
- $100 million – $150 million: ticket charge 5 bps; wrap 11 bps
- $150 million – $250 million: ticket charge 3 bps; wrap 9 bps
- $250 million – $500 million: ticket charge 1 bp; wrap 6 bps
- $500 million or more: free; wrap 4 bps
“The before picture was complex,” Cornick said. “There wasn’t as much standardization, and frankly it was more expensive.”
Questions about fees loom large for advisors, with a lot of them deciding “to take a wait-and-see approach” to the consolidation as opposed to engaging in “any kind of mass exodus,” according to recruiter Jodie Papike, the CEO of Cross-Search. Rivals are actively pitching the firm’s advisors, with a few moving to the competitors. In altering those specific fees, Osaic is responding to the growing threat from the registered investment advisory firm channel, she said.
“I think it’s a very, very important factor,” Papike said of the impact of advisory fees on the firm’s recruiting and retention. “So many firms now are looking at their platform and trying to figure out, if they are a traditional broker-dealer, how they can look and feel and function like a pure RIA. And part of that is looking at pricing.”
In his remarks at the conference, Price slammed the SEC’s approach to rulemaking ahead of taking the reins as the chair of the board next year of the Financial Services Institute, a trade and advocacy group for independent brokerages and advisors. The conference took place before the Labor Department proposed the “retirement security rule” this week to a chorus of criticism from FSI and other industry groups that had already been taking SEC Chair Gary Gensler’s team to task for trying to create too many new rules too quickly.
While Price acknowledged in an email interview that “for financial markets to work efficiently for everyone, there need to be rules, regulations, policies and procedures adhered to by firms who serve investors,” he said that there has been a “dramatic increase” under Gensler that has been coupled with much shorter comment periods for the industry to state its positions.
“This leaves little opportunity for those who must implement them and have a unique understanding of the practical day-to-day impact on investors to make constructive suggestions,” Price said. “The ability to access the SEC staff is more limited than ever, and therefore their ability to work with the industry to make a rule better is being lost. This has the pace of rulemaking taking precedence over getting the right rules implemented in the best way possible for investors.”
Despite the new rulemaking, Osaic’s profit margin of 14.6% for the 12 months ending in the second quarter surpassed its average of 11% between 2019 and 2022, according to a note by Fitch Ratings last month affirming the company’s non-investment grade reading of “B” with a “stable” outlook. Osaic, which is backed by private equity firm Reverence Capital Partners, displays high levels of debt at a ratio of 5.4 times its earnings, Fitch noted. While other private equity-owned firms have just as much or more leverage than Osaic, publicly traded firms often generate higher margins while carrying lower levels of debt.
The positive side of Osaic’s junk rating stems from its “improving market position as one of the largest independent financial advisors in the U.S.; cash-generative business model; relatively flexible cost base, which should help cushion revenue declines in downward market environments; high advisor retention rates; and continued organic expansion that, over time, should lead to improved leverage and interest coverage metrics,” according to the Oct. 17 note from Fitch.
“The ratings are constrained by still elevated leverage levels; weak interest coverage metrics; a relatively low, albeit improving, EBITDA margin; and the highly competitive environment associated with the independent broker-dealer and registered investment advisor (hybrid RIA) business model,” the note continued. “Osaic’s ratings are also constrained by its private equity ownership, which introduces a degree of uncertainty over the company’s future financial policies and the potential for more opportunistic growth strategies.”
Moving forward, the firm will be managing the process of combining eight brokerages with more than 11,000 registered representatives into a single firm. Across the brokerages — American Portfolios, FSC Securities, Infinex Investments, Royal Alliance Associates, SagePoint Financial, Securities America, Triad Advisors and Woodbury Financial Services — Osaic needed to choose between the range of fees previously collected by each of those firms, Papike said.
“When you’re bringing a bunch of firms together on one platform, you’re almost forced to look at things like that,” she said. Higher administrative fees “would not bode well for the firms that are charging less,” she added. “So I’m sure they had to go on the lower side to keep everybody happy.”