Blucora's move to spin off its online tax software arm in order to become a "pure-play" wealth management firm sets it on a collision course with the giants dominating the industry.
The Dallas-based company will adopt the name of its wealth management arm, Avantax, after the close of its deal to sell TaxAct to a private equity firm for $720 million, Blucora said last week. In the immediate term, an undisclosed number of Avantax financial advisors who also have stock in Blucora will profit from an expected $400 million to $450 million in capital that the firm plans to return to shareholders from the sale, CEO Chris Walters said in an interview. In the longer view, Avantax is betting that its niche of certified public accountants and other tax professionals with wealth practices on the side and a newer line of M&A business will enable it to compete with the massive firms at the top of the industry's food chain.
"We're focused on executing great sustainable growth strategies to deliver for our financial professionals and their customers," Walters said after the company announced the TaxAct deal on Nov. 1 as part of its third-quarter earnings statement. The company is "committed to this space" and "so excited about our continued push to be the unquestioned leaders in tax-focused wealth management."
Walters said further investments by the company in marketing services, growth consulting and customer support for advisors are on tap for the future. However, the company faces a challenge if it plans to keep up with the spending of firms like Raymond James, Advisor Group, Ameriprise and LPL Financial, which stated in its third-quarter investor presentation that its annual technology investments are on pace to jump 22% to $220 million by the end of the year.
LPL's headcount of advisors has reached a record 21,044 after massive gains to the tune of $84 billion in recruited client assets over the past year. Avantax has shown more modest progress, with a record $1.3 billion in recruited assets so far in 2022 setting a new high in only nine months. The firm's headcount dropped 5%, or a net 182 registered representatives, to 3,347 in the third quarter, although many of those losses involved low-volume advisory practices. At $658.2 million in revenue, Avantax is the No. 13 firm in Financial Planning's IBD Elite rankings of the largest independent brokerages in wealth management.
Avantax is "an ideal fit exclusively for one type of advisor," recruiter Louis Diamond, the president of Diamond Consultants, said in an interview. Several changes in ownership over the years and a rebranding from its prior name of HD Vest following Blucora's purchase of a competitor in 2019 could give some advisors pause about a potential future sale of the wealth management firm, Diamond said. Tech and platform spending by the bigger firms also gives them an edge over midsize Avantax.
"Within their swim lane they dominate, but I think it's going to be hard for them to step beyond it," Diamond said.
The ranks of larger midsize firms such as Signator Investors, Voya Financial Advisors, Waddell & Reed and American Portfolios Financial Services have thinned in recent years as giants like Advisor Group, Cetera Financial Group and LPL consolidate the wealth management industry. However, some midsize firms like Kestra Holdings and Atria Wealth Solutions have grown considerably as standalone companies with the help of capital from private equity backers.
Blucora reportedly received a bid offer from a PE firm in 2021 after defeating the first of two failed shareholder proxy fights in the past two years. One activist investor, Ancora Holdings, called for Blucora to sell TaxAct in August 2021. Representatives for Ancora said no one was available for an interview after Blucora announced the TaxAct deal this month.
Walters rejected any connection between the shareholder fights and the deal. While there will be consolidation of certain shared functions of Blucora's two units after London-based Cinven completes the deal by the end of the year, there will be "no change or degradation in the staffing that supports financial professionals," he said. Instead, the deal will bring "incremental investments" in advisor services, he added. Walters didn't say whether Blucora had received offers for Avantax or how it would evaluate them.
TaxAct took a roughly 40% hit to its profits in 2020 as a result of extra marketing expenses after the delay of Tax Day during the pandemic, he noted.
"Our management team and the board are constantly trying to do the right thing to create value for shareholders," Walters said. "The value was deeply impaired based on the pandemic-related effects."
