essays pieces of the puzzle
Thursday, July 26th, 2012
financial partners

In its 10-K for the year 2005, National Financial Partners (NFP) described itself as “a leading independent distributor of financial services products primarily to high net worth individuals and growing entrepreneurial companies,” adding that it operated “as a bridge between large financial services products manufacturers and our network of independent financial services distributors.”  Five days before that filing was released, NFP hit its all-time high of $59.61.

Less than three years later it was selling for 81 cents.

A recent InvestmentNews article reported a return by NFP to its previous approach of acquiring financial advisory practices.  It noted that NFP “had been one of the most aggressive buyers of financial advisory practices before the 2008 financial crisis, which derailed that effort.  Advisers typically sold a percentage of their practice to National Financial Partners in return for company stock . . . .”  It’s no wonder that the events of the last few years put a dent in that business model.

The sole revenue line of the firm’s financial statements says, “Commissions and fees,” which come from three product areas.   You can see the change in total revenues and earnings  in the chart above, along with the return on the stock since it came public in September of 2003.  (The missing link in the revenue line is caused by the recognition of an enormous loss during 2009.  Since the start of 2001, NFP has had cumulative net loss of $160 million.)  There were four additional offerings through early 2007, three of which have the use of proceeds described as “repay selling shareholders” on Bloomberg.

So, what to make of this firm?  It was an early leader in providing an alternative to the wire houses, but the field is much more crowded now.  The stock fetched 2.4 times trailing sales and 27 times trailing earnings at one time.  Those numbers are now 0.5 and 12.  The thing I’d most like to know is how exposed it is to very-high-fee financial products where the fees could be under pressure going forward.  From reading a description of the firm’s business lines, I’d guess it is quite exposed.  Perhaps on further examination I’d find out differently.

Everyone wants to be your “financial partner” these days.  But the key to the success of investment firms going forward is providing value:  good products with reasonable fees.  Too many financial products don’t meet that test.  And the firms that rely too heavily on them are destined to struggle.  It’s not a “partnership” if the seller of the product doesn’t have interests that are aligned with the buyer’s.

So, yes, for NFP and any other financial firm, it’s time to get granular.  You can’t extrapolate from today’s numbers if tomorrow’s will include lower “commissions and fees.”  (Chart:  Bloomberg terminal.  NFP reports earnings on Monday.)