The landscape of the independent broker-dealer market was transformed Thursday when Nick Schorsch’s RCS Capital Corporation (RCAP) announced it had agreed to acquire Cetera Financial Group for $1.15 billion in cash. Then, RCAP said today it would be buying yet another firm--Atlanta-based J.P. Turner & Co. LLC, with 325 advisors and $4.3 billion in client assets.
Those deals are in addition to the previously announced acquisitions of independent broker-dealers First Allied Holdings, Summit Brokerage Services and Investors Capital Holdings. Once the acquisitions are consolidated, RCAP will have some 9,000 advisors, second only to LPL Financial in the independent space.
Schorsch, chairman of RCAP, until recently was best known as the co-founder of non-traded REIT sponsor American Realty Capital who shook up the staid non-traded REIT industry. In an interview with Financial Advisor, Schorsch described his plans to build out RCAP into a fully integrated retail advisory, investment banking and product distribution platform.
Q: RCAP went public last June as a distribution and servicing company for non-traded REITs and other direct programs, particularly for products sponsored by American Realty Capital. Why this huge move into the independent broker-dealer space?
A: It’s not about the independent channel. It’s about the creation of the first true investment bank in probably the last 100 years. If you looked at how the last ones were created, they took a combination of investment banking, advice, mergers and acquisitions, and combined them with retail and institutional distribution and the support services to go along with that. What’s happened over the last two decades is that most people, the mass affluent, have been disintermediated by the big financial institutions. [Smaller investors] either go to E*Trade or Schwab. So the mass affluent have kind of missed out on the endowment model of investing [using an array of alternatives]. And advisors are looking for a place where they can get truly independent product and service their clients better with more diverse products. So this model gives the mass affluent access to the advice business.
Q: Why bring an integrated wirehouse-like model to the independent space?
A: What does the independent advisor not have access to that a wirehouse advisor does? The answer would be the ability to buy stocks through a market maker. Independents don’t have a bond desk, so they have to pay a markup. And they don’t have analysts and they don’t have access to IPOs. Those are all things we will give them.
Q: Are independent advisors really asking for IPOs and analysts?
A: Yes, they want information and they want to be able to compete. They want to be able to provide their customers everything. But the best part is, they don’t have to. They have a choice—they’re independent. But for us to add the most value for our advisors, they certainly should have access to those things.
Q: Some people wonder whether RCAP’s plan will be to push affiliated products.
A: RCAP, the public company, as it comes together, is going to be a completely independent business. There will be no [product] sponsor imbedded in that. The sponsor entity was spun off last year. Our percentage of [affiliated product sales] is declining because we’re selling more independent product, as it should be. Last year, it was about 65 percent sponsored products, which is anything that’s affiliated. We expect that over the next three years to go to 70 percent independent products on the wholesale side. On the retail side, that means it’s going to be about 96 percent or 97 percemt independent product. Our largest client, on the wholesale side of our business, is none of our own broker-dealers. That’s awesome. I love the fact that Schwab and some other big broker-dealers are our biggest clients.
Q: That won’t change with more distribution through your own broker-dealers?
A: No. Why would that change? That [broad distribution] makes us who we are. The last thing we want to eliminate is access by broker-dealers to our products.
Q: Won’t you have a challenging task of integrating all these broker-dealers?
A: That job comes down to people. Look at the team we’ve assembled, whether it’s [Cetera Chief Executive] Valerie Brown and her terrific team, or [First Allied Chief Rxecutive] Adam Antoniades and his team. When we bought First Allied, we had zero attrition. That’s what matters. We expect to have the same result with Cetera. We’ve hired all the senior management there already. Cetera has a phenomenal management team [and] has been big on consolidation, so that will allow us to use their platform as a hub. And every one of these companies is already on Pershing’s clearing system.
And remember, this is a very deliberate and careful rollup we’re doing. These are not broken companies. We’re not buying jettisoned assets. We’re buying companies intentionally to combine them, which has never happened in this industry.
Q: Will you keep the names of your broker-dealers and allow them to operate independently?
A: There’s no rebranding, and there’s no repapering of accounts. That’s one of the beautiful things of the consolidation. We already have them [managed] separately. We want to protect that culture of advisors. They matter. They are the most important aspect of our business, and we know it.