Despite DOL Travails, Ladenburg’s Profit Rises
Despite the travails that independent brokerage firms say they face in revamping policies, procedures and products to comply with the DOL fiduciary rule, Ladenburg Thalmann Financial Services Inc. on Wednesday reported second-quarter net income of $1.3 million following a loss of $17.8 million in the same period a year earlier.
The Miami-based company offers investment banking, institutional trading and insurance to its customers, but retail brokerage, Ladenburg’s biggest business following its purchase of Securities America and other acquisitions in recent years, fueled 90% of its revenue in the second quarter.
The sector’s profit of $5.4 million, up 57% from last year, offset a loss of $1.6 million in Ladenburg’s insurance brokerage business and more than $4 million of “corporate” losses. The insurance unit manufactures indexed annuities, among other products that may have been affected by the fiduciary rule that went into partial effect in June.
Revenue in Ladenburg’s independent advisory and brokerage business jumped 15%, or $37.2 million, from the second quarter of 2016 to $280.85 million. Expenses in the brokerage sector were up by $35.2 million, or 15%. The company more than doubled its broker recruiting expenses in the first half of the year to $1.4 million and expects that growth to continue.
“We believe that we have the opportunity through acquisitions, recruiting and internal growth to continue expanding our market share in this segment over the next several years,” it said in its earnings filing with the Securities and Exchange Commission on Wednesday. “Since 2007, our plan has been to marry the more stable and recurring revenue and cash flows of the independent broker-dealer business with Ladenburg’s traditional investment banking, capital markets, institutional sales and trading and related businesses.”
The company’s independent advisory and brokerage services sector includes broker-dealers Securities America, Triad Advisors, Securities Service Network, Investacorp and KMS Financial Services.
Unlike larger independent firms such as Ameriprise and LPL Financial that have been reporting falling commission revenue but rising advisory fees, Ladenburg had gains in both areas.
Commissions in the brokerage unit were up by $6.9 million, or 8% in the second quarter, while advisory fees were up by $22.4 million as advisory assets under management rose 21% from June 30, 2016 to about $63.4 million.
The commission gains reflected higher sales of variable annuity products and mutual funds, which offset declines related to lower sales of alternative investments, Ladenburg said. Independent brokerage firms have curtailed sales of high-commission “alternative” products such as privately traded real estate investment trusts and limited partnerships due to the fiduciary rule.
Ladenburg continues to amortize a seven-year forgivable loan of $15 million it received from its clearing firm, Fidelity’s National Financial Services, to help finance its 2011 purchase of Securities America, according to its earnings filing. The clearing firm forgives about $2.1 million of the loan and interest payments annually if Securities America meets annual clearing revenue targets.
Despite expectations that the DOL’s fiduciary rule will be modified before its scheduled full implementation in January 2018, Ladenburg warned that it expects the rule to “negatively impact” its future results due to higher legal, compliance, information technology and other costs. “Qualified” retirement accounts, including 401(k) rollover assets and individual retirement accounts that the rule applies to “make up a significant portion of our business,” Ladenburg wrote.