April 18, 2021


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Activist shareholder Ancora goes after Avantax parent Blucora

4 min read

An activist investor aiming to overhaul a midsize wealth manager’s parent firm is appealing directly to the firm’s advisors for support.

Ancora Holdings — an asset manager with $8.7 billion in assets that owns 3.4% of outstanding shares in Avantax Wealth Management parent Blucora — sent an open letter on March 17 to Avantax’s roughly 3,800 advisors, arguing they have “suffered for far too long due to Blucora’s missteps and poor decisions.” The salvo came three weeks after Ancora made its dispute public, in one of the few activist-investor campaigns to hit wealth management.

In nominating four new board candidates ahead of the Dallas-based Blucora’s annual meeting next month, Ancora is calling for Blucora to sell its tax preparation software, TaxAct, and stop charging a fee to advisors for direct-to-fund assets. Blucora responded to Ancora in its own March 15 letter to shareholders, saying the activists’ plan is “deeply flawed and would destroy shareholder value.” The dispute will cost Blucora $1.3 million in estimated expenses, its 2021 proxy states.

Given recent performance that includes losses of $342.8 million in 2020 after an impairment charge of $270.6 million for Avantax in the first quarter, often-apathetic shareholders “may be frustrated/fed up enough to vote this time,” Carolyn Armitage, managing director of investment bank and consulting firm Echelon Partners, said in an email.

“TaxAct is known for its low price point and simpler returns,” Armitage says. “This likely leads over to those with less potential money to invest, and thus not a great fit for conversion to a wealth management client.”

Armitage adds that selling TaxAct “would be a terrific strategic move” to take advantage of the buzz around fintechs, although the software could serve as a “business diversifier” if paired with other products like credit cards and mortgages.

Much of Ancora’s criticism of management revolves around the dearth of connections between the two business lines — more than five years after Blucora acquired the independent broker-dealer then known as HD Vest for $580 million. In addition, the activists cite high management turnover, a base of advisor-tax professionals that fell by a net 214 financial representatives to 3,770 in the past year and a fee of $60 per account on direct-to-fund assets.

“It’s not too late — they have a good business, they have a very good niche,” says Ancora CEO Fred DiSanto, referring to CPA practices that add wealth management through Avantax. “The advisors drive this business, they are your lifeblood. … It’s important to understand that, and I don’t think they do.”

The solicitation of shareholder support also extends to a federal lawsuit seeking an injunction against Blucora’s board nomination process that Ancora filed on Feb. 24 in the District of Delaware.

Asked about Ancora’s claims against the firm, representatives for Blucora referred the questions to a detailed nine-page summary in the company’s annual proxy about the activists’ talks with management. DiSanto’s firm began speaking with management in December, roughly a month after one of its affiliates began purchasing shares and 11 months after longtime board member Christopher Walters became Blucora’s CEO.

The firm is “making significant progress” in carrying out a new strategy to place it in position for long-term growth, and the activists have “the wrong plan for Blucora,” according to the March 15 letter to shareholders from Walters and the nine other board members.

“The board earnestly sought to engage with Ancora and its candidates, but on multiple occasions, Ancora refused to allow the board to even speak to its candidates,” it says. “When we did not accede to Ancora’s unreasonable demand that we seat Ancora’s candidates, sight unseen, as replacements for our existing directors, Ancora chose to launch a costly and distracting proxy contest.”

Furthermore, Blucora’s board added that “now is not the optimal time to sell TaxAct” because of the material impact of the coronavirus from the decision by the IRS to extend the tax deadline both this year and last year. Lower equity values and interest rates triggered by the first U.S. outbreaks caused the impairment charge in the firm’s wealth management business.

“The pandemic has had a significant negative impact on the global economy and caused a substantial disruption to securities markets,” CFO Marc Mehlman said in his first earnings call last May after joining the firm in April. “These factors negatively impacted key wealth management business drivers, interest rates and client asset levels to be specific.”

Regardless, the activists see the impairment charges as evidence of “serious capital allocation mistakes” under its “poorly-conceived” acquisitions of HD Vest in 2016, 1st Global in 2019 and HK Financial Services last year, Ancora’s letter to shareholder states. The company’s track record as activist investors spans earlier targets that have included SPS Commerce, Element Fleet Management, Bed Bath & Beyond and Big Lots between 2018 and 2020.

“Avantax can become a gem of the wealth management industry and a growing, thriving business if its advisors finally receive the respect, support and treatment they deserve,” according to the letter to advisors from DiSanto and Ancora’s three other board nominees.