Friday, January 17, 2014

Schorsch’s RCAP Grabs Cetera, Aims to Catch Up to LPL

Click to enlarge. Source: RCS CapitalRCS Capital (RCAP) said Thursday that it signed a $1.15 billion cash deal to acquire Cetera Financial Group — which includes about 6,600 independent financial advisors — from the private equity group Lightyear Capital.

With its recent purchases of independent broker-dealers First Allied, Legend Group, Investor’s Capital and Summit Brokerage Services, RCS is set to include about 8,900 advisors who work with about $190 billion in assets owned by almost 2.6 million clients.

RCAP Chairman Nicholas S. Schorsch could barely contain his enthusiasm on a call with investors. “This creates one of the most powerful capital accumulation machines on the globe,” he said. “It will attract the best and brightest financial advisors, and with $3.1 billion in revenue brings us close to LPL Financial (LPLA) and puts us ahead of others in the business.”

Cetera now has about 6,600 independent advisors. It was formed in 2010 following the sale of three ING broker-dealers and includes four platforms: Cetera Advisors, Cetera Advisor Networks, Cetera Financial Institutions and Cetera Financial Specialists. CEO and President Valerie Brown and the management team will remain on board once the deal is wrapped up, perhaps by June.

Industry observers were expecting news of another RCAP acquisition. “RCAP was in the market aggressively shopping, so I am not surprised they bought Cetera,” said Chip Roame, managing principal of Tiburon Strategic Advisors, in an interview with ThinkAdvisor.

Still, Roame noted, “This is very big news.”

'Logical Marriage'

RCAP and its units have recently acquired alternative investment producers, such as Cole Real Estate Investments and Hatteras Funds Group. “So it has a broad family of alternative-investments products,” Roame added. “This this seems like a more logical marriage of a broad family of alternative investments products and IBDs” than some other mergers and acquisitions in the industry have been.

RCAP executives say that its retail advice business should account for about half of total revenue this year. These operations, they stress, blend well with its other operations — wholesale distribution, investment banking and capital markets services, transaction management and transfer agency work. Its distribution network includes some 370 broker-dealers and 1,200 active selling agreements.

“This is the next evolution in the financial services industry,” Schorsch said on the conference call. “It combines Main Street and Wall Street.”

“By joining the RCS Capital family of companies, we become the cornerstone of the second largest independent financial advisor network in America and are positioned for even greater success in the future," Brown said in a statement. “Our shared vision for building a better industry through a combination of products, services and advice that begins and ends with the investor is what made the decision to merge an easy one.”

When Lightyear Capital bought Cetera from ING in January 2010, the independent broker-dealer space was growing rapidly, at an estimated 9% a year, according to Lightyear Chairman Donald B. Marron.

“We felt we could take our securities business experience and build a good firm, which we’ve generally done," Marron said in an interview. "Hence, we could sell it as we did.”

During the four years it owned Cetera, Lightyear saw the IBD network roughly double its client assets from $75 billion to $145 billion and do the same to its revenue base, which expanded from $617 million to $1.1 billion, he adds. 

Scale and leveraging capabilities are always going to be part of the financial-services industry, according to Philip Palaveev, CEO of the Ensemble Practice, an advisory-practice consulting firm based in Seattle.

"No one should be surprised by consolidation like this," Palaveev said. "Several organizations have been clear they want to grow this way. The next step in the process, he says, is clear differentiation about what makes the consolidator — and, by extension, its advisors — unique.

Future Focus

This year, RCAP may surpass Ameriprise Financial (AMP) in its number of advisors, but it isn’t likely to surpass the firm in terms of retail advisor sales and assets. And it has some room to go until it catches up to LPL.

In September, Ameriprise had 9,760 advisors and $390 billion of client assets. The company is expected to produce roughly $12 billion of total sales this year, with about $4 billion coming from its Advice and Wealth Management unit.

LPL Financial works with 13,500 financial advisors and 4,500 insurance agents. Analysts predict it will have $4.1 billion in 2014 sales. Its total client asset base is $415 billion.  

In terms of average yearly revenue (or fees and commissions) per advisor, RCAP's network of reps has about $187,000 in yearly production. In the third quarter of 2013, Ameriprise reps averaged $325,000 for the first nine months of 2013 and should top $430,000 at year end. (On the wirehouse side, Merrill Lynch reps exceeded $1 million in production per advisor in 2013).  

“I agree with RCAP,” said Roame. “This now is LPL's most clear competition in the IBD space, albeit with more of a product-based strategy than LPL.”


Check out Schorsch Open to Buying More Nonpublic Companies on ThinkAdvisor.

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