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10 Big Risks Facing New Cetera Parent

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Expect to hear more from REIT king Nicholas Schorsch and RCS Capital, his growing IBD holding company.

Even as RCS is working to close its $1.15 billion deal to buy Cetera Financial Group, Schorsch has made it clear that more acquisitions are in the works. In fact, in an SEC filing last month, RCS revealed that it has already paid $1 million to a "potential acquisition target" for an exclusivity deal that ends this month (but may be extended for two more).

RCS has been publicly touting the potential benefits of its acquisition strategy. But in the SEC filing, the company also spelled out what isn't trumpeted in press releases: several serious risk factors related to its pending acquisitions and its current business.

Some are pro forma, but others speak to real challenges facing both the industry and the company that will overnight become a key player.

Here are 10 of the big risks RCS says it faces:


RCS tells the SEC that it may be "unable to profitably operate the acquired businesses and realize the expected benefits."

The company's success will depend "in large part" on management's ability to integrate the operations, strategies, technologies and personnel of the acquired businesses, the company says. If the integration process takes longer or is more costly than expected, RCS may "fail to realize" some or all of the anticipated benefits of the pending acquisitions.

What's more, given Cetera's size and the other acquisitions RCS has made within the past 18 months, the company says it anticipates that the overall integration of the new businesses "will be a time-consuming and expensive process that could significantly disrupt our existing business, even if it is effectively and efficiently planned and implemented."

Other integration challenges cited in the filing include: retaining clients, key employees and financial advisors; maintaining an "appropriate" level of compliance and operational oversight; creating uniform standards, controls, procedures, policies and information systems; consolidating information technology platforms and administrative infrastructures and integrating corporate cultures.


RCS' operations "may suffer," the company says, if its independent retail advice platform "fails to attract new financial advisors or to retain and motivate existing financial advisors."

The market for experienced and productive financial advisors is, RCS notes, "highly competitive, and significant resources must be devoted to attracting and retaining the most qualified financial advisors."

What's more, a "loss of a materially large group of financial advisors could have a material adverse effect on our results of operations following the completion of the pending acquisitions," according to RCS.


Poor service or investment performance may cause clients to leave, and the price of services and financial products in relation to competitors must also be monitored, RCS says in the filing.
Commission and fee schedules on RCS' independent retail advice platform may "need to [be] adjust[ed] to remain competitive," the company says.

"Competitive pressures on the pricing of services or products can also cause clients to shift their accounts and investments to a different financial advisor or financial product," RCS notes.
Revenues would decline, the company says, if the independent retail advice platform or the investment management platform "experiences losses of managed accounts, or fails to attract new ones."


A wave of consolidation has increased competition among RCS's rivals -- a group that includes "national and regional full-service broker-dealers and a broad range of other financial services firms, including banks, investment advisors and insurance companies."

Many of those companies, RCS says, "have significantly greater financial, technical, marketing and other resources than we do."

Many offer their clients "more products and research" and "may be able to respond more quickly to new or changing opportunities, technologies and client requirements," RCS says in the filing.

Competitors may also "have lower costs or provide more services," and may offer their clients "more favorable commissions, fees or other terms" than RCS or the businesses it may acquire.


RCS says it has "total indebtedness" of $771.6 million as of Dec. 31, 2013.

That debt, it says, "could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes."

What's more, the amount of debt "may limit our flexibility in planning for changes in our business and the industry in which we operate, and limit our ability to borrow additional funds." As a result of the debt, RCS continues, "we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness."

RCS is also limited in the amount of capital it can draw from any broker-dealer subsidiary, the company says. "If our cash flows and capital resources are insufficient to fund our debt service obligations," the company states in the SEC filing, "we could face substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness."


Broader recognition and positive perception of RCS brands, the brands of our operating subsidiaries, and the brands of any new businesses, "are essential to our future success," RCS says: Successful positioning of the company's brands will depend on the success of advertising and promotional efforts, an increase in the number of users and page views of its websites, and the ability to "continue to provide a website and services useful to our clients."

RCS says it intends to continue to pursue an aggressive brand enhancement strategy, including multimedia advertising, promotional programs and public relations activities.

Those initiatives, the company acknowledges in the SEC filing, requires "significant expenditures." If the brand enhancement strategy is unsuccessful, RCS continues, "these expenses may never be recovered and we may be unable to increase future revenues."


Highly specialized and, in many cases, proprietary technologies are required to support essential operational functions of the independent retail advice platform, RCS says in the filing, citing portfolio management, client service, accounting and internal financial processes and controls, and regulatory compliance and reporting.

The technology platforms also enable the independent retail advice platform to serve the needs of, and attract, financial advisors and serve the needs of their clients, the company says.

"There can be no assurance that we will be able to effectively adopt or develop new or adapt existing technologies to meet client, industry and regulatory demands made upon the independent retail advice platform, " the company states, "and any failure to do so could materially and adversely affect our results of operations following the completion of the pending acquisitions."

RCS says that although it might be required to make significant capital expenditures to maintain competitive technology and retain skilled information technology employees, "there can also be no assurance that we can retain such skilled information technology employees or that our investments in staff and technology will successfully meet the needs of financial advisors and their clients."


RCS says it expects the acquired businesses will continue to be operated independently under their existing brands and management.

But future success "depends upon the continued services of key senior management personnel of the acquired businesses," the company acknowledges, "including executive officers and senior managers."

The loss of one or more of the key senior management personnel of the acquired businesses, and the failure to recruit a suitable replacement or replacements, "could have a material adverse effect on our business," RCS says.


RCS' businesses will mostly operate through small, decentralized offices, largely with financial advisors who are not direct employees, the company says. "We will not always be able to prevent misconduct and errors by financial advisors," the company acknowledges, "and the precautions taken to prevent and detect these activities may not be effective in all cases."

SEC and FINRA rules require broker-dealers on RCS' independent retail advice platform to supervise the activities of their financial advisors.

However, RCS notes, "a substantial number of the offices will be supervised by registered principals off-site, which may make supervision more challenging."

10. LIMITS ON 12b-1 FEES

RCS notes that in 2013, the businesses it acquired received $345.2 million in 12b-1 fees paid by investors who purchased shares in select mutual funds.

The SEC has proposed new rules and disclosure requirements that, if adopted, would significantly change the existing regulatory framework governing 12b-1 fees, including distribution and servicing fees, and ongoing sales charges.

If the SEC does limit the ability of any of RCS's companies to receive 12b-1 fees, then the revenues and earnings of those firms "could be negatively impacted," RCS says, "which could have an adverse effect on our growth strategy and our business following the completion of the pending acquisitions.

The U.S. Department of Labor, RCS notes, is also considering eliminating commissions and 12b-1 fees on qualified retirement accounts, including IRAs.

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