By Jed Horowitz
NEW YORK, May 14 (Reuters) - RCS Capital Corp, the
new owner of the fastest-growing independent brokerage business
in the securities industry, disclosed on Wednesday just how
skinny profits in that business are.
Cetera Financial Group, which RCS bought two weeks ago for
about $1.2 billion, eked out net income of $991,000 in the first
quarter on revenue of $301.2 million. It lost $545,000 in the
prior quarter, RCS said in regulatory filings detailing three
purchases it expects to complete this quarter.
The numbers may explain a management shakeup that RCS
announced at Cetera on Tuesday. RCS elevated veteran independent
brokerage executive Lawrence (Larry) Roth to chief executive to
replace Valerie Brown.
"Ms. Brown believes now is the right time for her to
transition from her role as CEO of Cetera into a consulting role
with Cetera and on to other pursuits," RCS President Michael
Weil said in a prepared statement.
Brown, who oversaw about 6,800 brokers in 4,544 offices at
Cetera's three brokerage units, could not be reached for
RCS Capital Executive Chairman Nicholas Schorsch also owns
AR Capital, which sponsors and advises private real estate
investment trusts, lease programs and other nontraditional
investments sold through independent brokerage firms. His
decision to replace Brown took some insiders by surprise since
he had repeatedly praised Brown's talents since announcing plans
to buy Cetera last year.
Some competitors who asked for anonymity said Brown opposed
selling many AR Capital products to Cetera's relatively
unsophisticated "mass affluent" investors, which it defines as
those with $100,000 to $1 million of investable assets.
In a filing on the planned acquisitions on Wednesday, the
company said: "RCAP will offer financial advice and investment
solutions to mass affluent investors with investment needs that
are not served by the offerings and capabilities of captive
investment advisers and broker-dealers."
RCS plans to buy three additional broker-dealers by the end
of this quarter - J.P. Turner & Co, Summit Financial Services
Group and Investors Capital Holdings - and last year paid $177
million for First Allied Securities, an independent firm with
almost 1,200 brokers.
Each firm will operate autonomously under its own name, and
brokers will be able to choose the products they sell, RCS said
in its filings. But the firms will be supervised at the top by
Roth, whose title is CEO of Cetera Financial Group and who was
hired by RCS last summer to expand distribution of investment
When the new acquisitions are complete, RCS will be the
second largest independent brokerage network in the U.S., after
LPL Financial Holdings. On a pro forma basis, it would
have had about 9,100 financial advisers with 1.9 million clients
and $208.3 billion of client assets as of March 31, the filings
on the proposed acquisitions said.
Cetera, the largest of the group, has about $152 billion of
client assets under administration.
Brokers at independent brokerage firms are contract
employees, meaning they buy investment products, marketing and
regulatory services from the firm and pay for much of their
overhead. They retain an average of about 89 percent of the fees
and commissions they collect from clients, in contrast to the 40
percent to 50 percent payout that top advisers keep at firms
such as Bank of America's Merrill Lynch, Wells Fargo &
Co's Wells Fargo Advisors and UBS Wealth Management Americas
The high payout explains why profit margins at independent
broker/dealers are much narrower than those of traditional
RCS expects to report a first-quarter profit of $12.7
million, down from $33.9 million in the fourth quarter,
according to the filings. It has been paying a dividend of 18
cents a share but will suspend the payout for the foreseeable
future because of restrictive agreements on use of its revenue
dictated by banks and other lenders that financed its purchase
RCS, whose shares have ranged from $14.86 to $39.98 since it
went public last summer, rose 14 cents to $33.15 in Wednesday
(Reporting By Jed Horowitz; Editing by Steve Orlofsky)