Its hard to think of an executive in the advisory business whose influence has become more prominent over the past year than Nicholas Schorsch, executive chairman of RCS Capital, who is also a leader in the nontraded REIT industry.
Schorsch has snapped up jumbo independent B-D network Cetera Financial Group for $1.15 billion, as well as J.P. Turner, First Allied Holdings, Investors Capital Holdings and Summit Financial Services Group. Schorsch sat down with Financial Planning editors at his Park Avenue office in midtown Manhattan to discuss the advisory business in general and RCS Capitals plans specifically.
- Watch the video: Schorsch Sees 'Demonstrable Need for Retail Advice'
Did you overpay for Cetera?
Did we pay full value? Of course we did. Why? We wanted Cetera. If we were buying a small company with $50?million in revenue, we probably should have paid 40% of revenue. If we were buying a $100 million revenue company, we should have probably paid 65% of revenue. But when youre buy a $1.15 billion company, paying one times or 0.8 times which is what we actually paid, based on the 2014 run rate its not a big price.
I dont think we bought it cheap, but I think we paid a fair price. This is a business where scale matters.
The SEC filing says youll offer advisors stock ownership. Details?
It all came out of listening to the advisors. Many of the advisors were offered ownership in Cetera when Lightyear bought it. And many of them did that. So they asked, Is there a way to roll that over? And we thought, Wow, what a great idea.
It doesnt cost our investors money to allow them to co-invest, so we decided to offer it to all of the acquired companies, not just Cetera; First Allied, ICH, Summit and J.P. Turner. And were going to allocate stock for them in the S1 so they can buy the same way the retail investor and institutional investors will buy in the offering. And then there will be a warrant program with a retention period of four or five years. Theyll have warrants and stock and itll be for both 1099 employees and W-2 employees.
Anybody who wants to participate can, but they dont have to. Its not a method of selling stock. Its offering them the ability to be shoulder to shoulder with us.
How are you approaching branding?
You cant homogenize the multiple faces of retail advice. So you actually need a guy with a Cetera card. And another team that maybe has a First Allied card. Because they have a certain following.
The best analogy I can give you is: Under the umbrella of Toyota you have Lexus, which is a brand and it has a certain cult following; its viewed as a luxury brand. You have Scion, which most people dont know is owned by Toyota, and then you have Toyota.
Theyre all very fine companies, but they work off the scale and the backbone, the technology and the resources and the balance sheet of Toyota. And its a miraculously good business.
How do you define the mass affluent market? Whats the minimum for investable assets?
We think its $300,000 to $3 million. Its a pretty simple designation. And $3 million may be a little high, because that gets into the bottom of the sweet spot for some of the financial institutions.
We dont want to overserve the population, but we think there are about 30 million households and about $8 trillion in investable assets in our market.
What is your response to advisors concerned that they will be pressed to sell nontraded REITs from your American Realty Capital?
The response is very simple: No. Thats not our intention. Theres no pressure to sell any of our products. You want to sell them, sell them. You dont want to sell them, you dont.
We already have absolute dominant market share. We sold $8.8 billion last year in an industry that, the year before, was about $8 billion. And then the industry grew to almost $20 billion, because they still sold $8 billion, or $10 billion, from other people and they sold almost $9 billion of ours. Which is good. But lets be honest: You cant sustain a 45% market share in any industry. Its not a sustainable business model.
Did you have any objections to FINRAs new guidelines for calculating nontraded REIT values?
Im very supportive of them. Most of our nontraded REITs already comply. We have a daily NAV program that prices daily. We have a GDC that prices on NAV plus commission.
I think transparency is transformational. And the more information we can give the investor it may hurt the industry 10% or 15% or 20% for the first five months when its implemented, but once people understand it, maybe more people will sell nontraded REITs.
What we care about is that the investor understands what hes buying. And if the product is better, itll do more business. We want to see this industry grow from $20 billion a year, which it is this year, to $50 billion.
Youve expressed interest in holding an industry event, like Schwabs Impact conference.
Were working on it right now. Were hoping to have it in place either late this year or early next year some kind of a national program, where we can then bring all of the various sponsors that work on our platforms into a cohesive array for an informational event.
What other opportunities do you see in the advisory business?
I think about diversification. RIAs are great; Id buy a few RIAs. And Id like to buy a couple of big family offices, because thats aspirational and then you have something for our big advisors to aspire to. Not that theyre very profitable, because they arent. But its nice to have somebody that has financial planning and maybe they have psychologists on staff to help families as well as family guidance and family governance. I think we can build something really bespoke, something special.
How big do you want to get?
Size is irrelevant. Are we going to look at other companies? Sure we will. Are we going to get bigger? I dont know. The conversation we had with Cambridge [about a potential deal] was interesting, but its just that. Its a conversation. And Im sure well have a lot of conversations over the next year.
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