Leading advisors at Cetera Financial Group say RCS Capital should either "fix its balance sheet problem" or sell the firm.
Failing either remedy, Cetera advisors will be forced to leave the firm, they contend.
"If [RCS founder] Nick Schorsch and the RCS Capital board cannot find a way to [do so], people are going to look to go elsewhere," says Dave Hubbard, a member of Cetera's regional directors advisory board and president of Exemplar Financial Network in Crystal Lake, Ill.
"At the end of the day, if you don't make your producing advisors feel like they are happy and comfortable and feel like they have a future, they won't stay."
Well-known recruiting firm Diamond Consultants says it has seen a marked increase in inquiries from Cetera advisors over the past year, according to Diamond senior consultant Deborah Aronson.
According to RCS, it "is exploring options to raise significant capital to rationalize the RCS capital structure." Hubbard and John DeSalva, also a member of Cetera's regional directors advisory board, say that involves seeking potential buyers for Cetera, as part of an effort to examine a wide range of solutions to the problems with REIT kingpin Schorsch's empire that caused RCS's stock to collapse from a high of $40 last year to $1.20 recently.
On Monday, the prospect of a Cetera sale prompted the stock to jump from its $1.19 opening to $1.50 before it closed at $1.23.
In a statement, RCS says it has hired asset management firm Lazard to "[position] the business for growth and long-term value creation for all stakeholders." RCS is shopping Cetera for $700 million, a $450 million haircut off the price Schorsch paid for it last year, Bloomberg reported.
Much of the drop in RCS stock (also known as RCAP) occurred after executives at another Schorsch firm American Realty Capital Properties (now called Vereit) announced last year that it had intentionally hid accounting errors.
Since then TIAA-CREF, one of the country's largest retirement fund providers, has sued American Realty and Schorsch, alleging that he and his collaborators earned nearly a billion dollars in commissions and fees in a frenzy of dealmaking to the detriment of the firms' themselves and their REIT investors.
The suit alleges that Schorsch, who made his fortune in the REIT business, and his collaborators own dozens of firms, many of which sat on both sides of a long laundry list of buyouts and other deals.
A spokesman for American Realty did not immediately respond to a request for a response to the allegations.
Schorsch pushed into the advisory industry last year, buying up a total of 11 independent broker dealers and rebranding them under the Cetera name. The acquisition spree transformed Cetera into the largest IBD in the country in terms of advisor count, with more than 9,500 advisors, second only to the country's No. 1 IBD LPL Financial.
Schorsch funded his IBD spree largely by taking on debt.
If RCS keeps Cetera, it needs to address some of its financial problems, including potentially renegotiating the terms of the $600 million to $800 million it borrowed in order to buy the IBD, Hubbard says. It also could negotiate terms of its preferred stock with its stockholders.
He hopes it can do so: "I've been at this broker dealer for 30 years and I'd just as soon stay here," Hubbard says.
"To the extent RCS can clean up the balance sheet, I think there is a lot of value to be unlocked," adds DeSalva, who is also the president of Georgetown Financial Group in Georgetown, Conn.
Advisors who took RCS up on its offer last year to buy a minimum investment of $30,000 in RCS stock for the chance to acquire warrants to purchase more stock at $20 a share also want new terms to make up for the losses they have incurred as the stock plummeted, says DeSalva. He and Hubbard say they both invested in the plan last year.
ADVISORS SEEK HELP
"There would be a variety of things in an effort of good faith that they could do," says Hubbard. "They could re-price the warrants at the current price so somebody wouldn't have to wait for it to go back to $20 a share to go back into the money. They could try to do something to help those people who participated without favoring anyone because there are rules about what you can do with public stock."
Hubbard says that, in all, he has bought RCS stock worth somewhere in the six figures, much of it since it began its downward slide (and outside of RCAP's investment plan for Cetera advisors), because he believes the firm's current management team is capable of addressing its problems.
RCS recently sold its wholesale division for $25 million to private equity firm, Apollo Global Management, which also entered into a strategic relationship with Cetera.
Apollo executives have experience in renegotiating complex financial deals, DeSalva says.
"If there's an organization to do it, I think they are the ones," DeSalva says.
The revelation that RCS may sell Cetera puts a new spin on the recent departure of its former board member Larry Roth, who quit the RCS board to focus his energies on his position as CEO of Cetera.
Now a buyer would acquire the widely respected Roth without the encumbrance of his former ties to RCS.
SHED RCAP BURDEN?
For their part, the regional Cetera leaders – representing about 3,000 or a third of all the Cetera advisors – have retained their own investment bankers and lawyers to advise them as they participate in talks with Apollo, Cetera and RCS over the best way to address the current problems, Hubbard and DeSalva say.
"The value of our businesses may be best served by staying with Cetera if Cetera can shed itself of the burden RCAP has placed on it," DeSalva says, who adds that he would prefer to remain. "We don't have a problem with Cetera. We have a problem with RCAP."
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