Avantax Brand Isn't Going Anywhere: Cetera's Durbin

Q&A December 26, 2023 at 03:59 PM

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Now that Cetera Financial Group has completed its $1.2 billion acquisition of tax-focused Avantax, what's next?

Assimilation. But not integration.

"We're taking a 'do no harm' approach of minimum disruption to the advisors," Mike Durbin, CEO of Cetera Holdings, who oversaw the deal, tells ThinkAdvisor in an interview.

The acquisition brings more than 3,100 financial professionals, $82.3 billion in assets under administration and $42 billion in assets under management to Cetera.

Cetera Financial Group serves advisors, tax professionals and institutions. Pre-acquisition, it had 9,000 financial professionals and their teams, $374 billion in assets under administration and $145 billion in AUM.

Avantax, which will remain a stand-alone business and retain its brand, delivers tax-focused planning for advisors, tax pros and CPA firms. It has an employee-based model, Avantax Planning Partners, and Avantax Wealth Management, an RIA for independents.

Durbin sees the significance of "tax sensitivity," as he terms it, as an essential component of "21st century planning."

"If you're going to be world class at financial planning, you need tax planning … in addition to traditional wealth planning," he argues in the interview.

Avantax brings San Diego-based Cetera a clearing relationship with Fidelity. This expands Cetera's multi-custodial platform, building on its existing use of BNY Mellon Pershing and Cetera's self-clearing unit.

Durbin, who was named CEO of Cetera Holdings in May, was previously with Fidelity for more than 14 years, most recently as head of Fidelity Institutional. He details the significance of the Fidelity addition in the interview.

He also talks about what he calls "an increasing RIA-ization of the marketplace."

In the conversation with Durbin, who was speaking from Woodstock, Vermont, he pointed out Cetera's emphasis on both organic growth and more acquisitions. As for Avantax's growth profile, it is "equally as rosy as what Cetera's was even prior to the deal," he says.

Here are excerpts of our interview:

THINKADVISOR: Why is acquiring Avantax such a significant part of Cetera's growth strategy?

MIKE DURBIN: There are more and more households in this country that could benefit from the advice and guidance of a human tax advisor.

Yet, as an industry, we're not producing high growth rates of additional advisors coming into the profession, though there's strong demand for them.

So, with the secular dynamics that are afoot in our industry, we have a good secular wind at our back.

Why is Avantax a good fit with Cetera?

Cetera already had a tax planning specialty: One of our business models is Cetera Financial Specialists, several hundred financial advisors-strong focusing on tax expertise. And we also have partnerships with independent CPA firms.

The ability to bring the two [entities] together, to double down on the scale effect, was a clear market opportunity.

Tax specialization and partnership with CPAs can lead Cetera to build out our capability to bring real tax sensitivity to what we think is [part of] the 21st century planning that more and more households are looking for.

Was Avantax's registered investment advisory a big attraction for you?

That was part of it, for sure. There's already an increasing RIA-ization of our marketplace. We have a growing RIA service proposition in the Cetera network.

Avantax was a good M&A candidate to join our network because they see the market the same way we do.

What are your growth expectations for Avantax?

They're right in line with the growth expectations of Cetera. Avantax's growth profile is equally as rosy as what Cetera's was even prior to the deal.

This industry is poised to continue to have attractive organic growth because the demand base is growing.

But we'd like to do better than overall industry growth. That's [by way of] how we go about fueling organic growth and continuing to pick our spots on M&A-fueled growth.

Our single private equity sponsor, Genstar Capital, are investors in growth.

We [recently] closed our fundamental re-investment by Genstar in Cetera. We think we're poised for above-market rates of growth.

Other RIAs have recently told me that they're adding in-house tax strategies and tax management capabilities to their client offerings. Is this a trend?

If you're going to be planning-based, you can't ignore taxes. [Traditionally], most advisors shared the same [stance], "I'm not touching taxes. I'm not getting involved in taxes. I'll leave that to the CPA."

That probably means you're competing on the basis of how you run money and produce alpha, which is pretty hard to do on a sustained basis.

So I think you're seeing more and more advisors step into, "If I'm going to be a real financial planner, I have to pay attention to insurance, taxes, retirement, banking and lending, in addition to just the wealth portfolio."

Why is the RIA-ization of the marketplace happening?

RIA is a business model in a regulatory framework that aligns nicely with a planning-based value proposition.

To be an RIA vs. a broker-dealer, means less up-front cost. It's less capital intensive.

The outside market values an RIA at a higher multiple level than a non-RIA because it has the attributes of being discretionary, where the revenue is repeatable and recurring with basis points on assets.

And it's relationship-heavy.

What's the future of RIAs?

We're not a firm that says everything is going to end up RIA. We think that long term, the hybrid advisor that embraces planning and has a fiduciary bias but continues to have access to products and services on a transactional basis is better for the end client.

For example, sometimes it's better to buy fixed income for a sales credit rather than charge a fee on a discrete fixed income ladder portfolio.

There's a clear secular trend toward RIA, but not at the expense of a hybrid model. We see them co-existing and thriving together long term.

How will Cetera's profile change once its five-year growth strategy is completed?

Five years from now, I want us to be known and operating simultaneously at scale across our growing set of affiliation models and markets of specialists that we choose to pursue.

Avantax is an acute example of that.

It's pretty clear from all the research I've seen that the emerging winning business models are those that are architected around planning.

A planning-centric proposition to engage a household seems to be producing above-market results vs. more legacy wealth management, like "I'll run money for you. I'll do your asset allocation. And I'll produce returns for you."

Research and our own experience show that the planning-based models garner more wallet share, engage more households, prove to be more sticky.

And if you're going to be world class at financial planning, you need tax planning, retirement planning and risk or insurance planning, in addition to traditional wealth planning.

What changes in asset custody have been made with the Avantax acquisition?

Pre-Avantax, Cetera used both BNY Mellon Pershing and Cetera's self-custody capability too. With the acquisition of Avantax, we're picking up a clearing relationship with Fidelity: We didn't want to force a transition of clearing firms for the Avantax advisors and their clients.

And for us, we now have a large and growing Fidelity relationship that opens up a market for recruiting, tuck-ins, follow-on acquisitions.

The next Fidelity-clearing piece of business will be that much easier because we already have that capability with Fidelity. This is all about continuing to go after future growth.

What are the challenges in integrating Avantax with Cetera?

We don't call this an integration because we're retaining the clearing relationship with Fidelity, we're retaining the Avantax brand, we're retaining Avantax's ability to stay organized around a dedicated community.

One challenge is how to bring the companies together where we can begin to take advantage of this scale effect but not at the expense of any disruption to the advisors, CPA firms and the teams that support them.

So we're taking a "do no harm" approach of minimum disruption. But there's no doubt that it's challenging.

Both Cetera and Avantax advisors are probably wondering: "What exactly does this acquisition mean to me?" Your thoughts?

The clearing firm, product offerings, prices, resources, service, marketing, practice management are all being retained under the minimize-disruption category.

What we're endeavoring to do with Avantax is that if we're ever going to make a change or improvement along any of those lines, there needs to be an upgrade.

It's not uncommon [generally] for an existing advisor to say, "I know you're focused on growth. But don't forget about us."

As a leadership team, we're extraordinarily focused on organic growth. So the priority is always going to be to take care of those we have.

But in a consolidating market, in which we're operating, we also will pick our spot[s] to aggressively acquire, such as Avantax.

It's very important, however, that it doesn't disrupt the incumbent momentum.

Any other challenges?

To assure that there's cultural alignment. Do we see the market we're now going into together in the same way? Do we engage in business practices that are culturally aligned?

We knew that we both have a clear focus on tax planning, but we also knew with real confidence that there was an immediate cultural affinity as well.

Is Avantax retaining its name as a separate community?

It is. We will retain the Avantax brand because there's equity in that brand with those advisors and CPA firms that see the world the same way we do in acute tax specialization.

And then, too, the nature of this M&A transaction is that we bought 100% of the listed equity of a public company called Avantax. So we bought the brand.

How does that differ from other acquisitions you've made?

Many of Cetera's other recent M&A acquisitions were carve-outs of wealth management businesses from a parent that continued to operate. So [in those instances] we didn't buy the brand.

But where we can have access to a brand and continue to drive differentiation and build equity value, then we're delighted to keep it.

How does Avantax strengthen Cetera's established succession solution?

We have a program in which we take a minority interest in a practice today and put it on a path of certainty, comfort and patience: When [the advisor is] ready to retire in full, we'll acquire their practice outright.

Part of our sub-pitch is that you come to Cetera early in your career and grow your practice over years — potentially decades — and it will evolve with your market and your growth. Cetera will evolve with you.

The succession solution is the natural capstone when your career has gone full circle. You don't have to leave to monetize your practice and put your team and customers through that kind of disruption.

You can stay right here, and we'll help you monetize your practice and turn it over to your existing team of, sort of, junior partners who stay with us in an affiliation model — an RIA.

So you can move along the spectrum and never have to leave Cetera.