Are advisors slipping away from Cetera Financial Group?
Just last week, the company’s Twitter feed description said the broker-dealer served 9,700 advisors. Yet a bankruptcy filing Feb. 1 by the company's parent RCS Capital showed the number was "approximately" 9,100. This week, after inquiries by Financial Planning, Cetera changed the Twitter description to read "nearly 9,100."
Representatives for Cetera attributed the decline to the “routine elimination of insufficiently productive advisors,” and noted that the shutdown over the summer of one of its B-Ds, J.P. Turner, caused it to shed 200 advisors.
However, there are worries that the company may start seeing more advisors leave as RCS goes through bankruptcy restructuring, leaving some to feel uncertain about their futures with the B-D.
"I would be surprised if there were not an exodus," says Paul Remack, formerly with the Cetera subsidiary B-D VSR Financial Services in Walnut Creek, Calif. Remack left in 2014 to become a certified professional fiduciary for clients. This was after RCS Capital acquired the B-D, but before RCS imploded after a series of a scandals in another company started by its founder Nicholas Schorsch. Remack says his own move was prompted by his desire to serve as a full fiduciary, with no conflicts of interest involving commission income.
Read more: Cetera Sues Two Execs for Joining Competitor
The country's second-largest independent B-D by headcount can ill afford an advisor exodus. The success of its prepackaged bankruptcy plan, filed in January, depends on their retention.
"Significant attrition in the [Cetera] financial advisor network, and the attendant loss of customers, would result in a material erosion of [its] enterprise value," David Orlofsky, Cetera's chief restructuring officer in the bankruptcy, wrote in a filing last month.
So will they stay or will they go?
Interviews with a dozen current and recently departed Cetera advisors suggest that Cetera veterans are more likely to stay put, while advisors who found themselves part of Cetera during its parent company's acquisition spree that begin in early 2014 feel much less loyalty.
Wherever they came from, all those advisors watched RCS rise to prominence and its stock climb to almost $40 in March 2014, from a little more than $14 in August 2013, as Schorsch began buying up B-Ds around the country. Then they watched RCS collapse after revelations that another firm owned by Schorsch, American Realty Capital, intentionally hid accounting errors. That scandal, and other American Realty regulatory woes, came to taint RCS as well. Its stock was delisted in January.
'SHAME ON ME …'
Many of those advisors, including Remack, owned thousands of dollars in RCS stock.
"Fool me once, shame on you; fool me twice, shame on me," Remack says Cetera advisors must be thinking when considering their prospects with the B-D.
More than a year ago, most Cetera advisors did indeed harbor doubts, says Minneapolis-based Cetera regional director Dan May, president of AdvisorNet Financial and a longtime Cetera veteran. “I believe all advisors and regional directors started on a daily or weekly basis asking, ‘Is this the place for us?’” May recalls.
To help answer this question, the regional directors hired their own investment bankers, lawyers and other advisors. They have been in communication with RCS' leadership and Cetera’s CEO, Larry Roth, who have worked with the company's main lien holders and creditors to put together the bankruptcy plan.
SEVERING TIES TO SCHORSCH
If approved by the court, a reorganization would sever Cetera's ties to Schorsch, greatly reduce its debts and set the company on a course toward full recovery, with the support of a majority of its creditors, May believes. It would provide a $150 million injection of capital from bond holders to help Cetera transition to independence.
Nobody to whom RCS owes money wants to see its most valuable asset, its advisory business, go under, he adds.
"We have cleared the deck," he says, "to where we are excited about Cetera's future."
Not everyone, however, shares his confidence.
Last month, a group of 40 advisors from Williams & Co. in Grandville, Mich., left Cetera for a much smaller B-D and cited the bankruptcy as a factor in the move. “They wanted to control their own destiny,” a spokesman said of their decision to leave.
A CHALLENGING TRANSITION
In October, another seven financial advisors with Landmark Bank, a community bank in Texas, Oklahoma and Missouri, also left Cetera, some after more than a decade with the B-D, for Raymond James.
The “problems with [Cetera's] current owner were not the primary reason, but there was some concern,” says Landmark advisor Dave Reed, who championed the move. The Landmark advisors asked themselves, he says, “Do we want to sit around and see if Cetera comes up with the kind of change that we want?”
That said, if members of the Landmark group had to do it over again, they might not have left, Reed says, given the surprising hardship of the "repapering" process of moving client accounts to the new B-D. Reed and another advisor said they have lost clients due to errors on Raymond James' part during the rocky transition that is still underway five months later.
“It turned out to be a debacle," he says.
John Houston, managing director of Raymond James Financial Institutions Division, says the B-D takes advisor satisfaction seriously and that he has heard consistent feedback from leaders at Landmark that they expect the move will benefit clients.
“Transitioning from one business partner to another is never without its challenges," Houston says, "particularly during times of high market volatility such as what we’ve experienced recently.
Another Landmark advisor, Miles James, agrees the move has been tough, but thinks it will benefit his practice in the end, thanks in part to Raymond James' superior technology.
SCHORSCH IS 'PERSONA NON GRATA'
John Jackson, a regional director with Cetera Advisor Networks in Pasadena, Calif., who has been with Cetera or one of its predecessor firms for 27 years, says he is staying put.
In the bankruptcy plan, “we got rid of all the garbage and deadwood,” says Jackson. Schorsch “is persona non grata around here.”
Jackson says he has the highest confidence in his own firm's president, Douglas King, and in Cetera’s Roth.
“I think we will come out of this period kind of reinforced and being the stronger for it,” said, Colin Mackenzie, a longtime colleague of Jackson's who is also regional director at Cetera Advisor Networks.
'OUT OF YOUR COTTON-PICKING MIND?’
One factor that is likely to incline Cetera veterans to remain with the firm is the large deferred compensation plans they have been paying into for years. Those plans are serving as golden handcuffs at a critical time: Any advisor who leaves Cetera must take the accumulated amounts as a lump sum, but lose about a half of their value to taxes in the process.
"Are you out of your cotton-picking mind?" Mackenzie says he would say to any Cetera advisor with such a plan who is considering leaving. "Why would you take an asset that is growing tax-deferred and trigger a distribution?"
Still, if Cetera advisor Cameron Thornton is representative of other longtime veterans, the B-D has more work to do to persuade its advisors to stay.
Thornton, based in Burbank, Calif., joined one of Cetera's predecessor firms 33 years ago, back when it had just a few hundred advisors. That means that, in his entire career, he's never had to switch B-Ds and go through the hassle of repapering clients. He has also been paying into a deferred compensation plan for some time.
Recently he had some time to reflect about his B-D during a hospital stay that extended through Christmas.
'I'M JUST A NUMBER TO THEM'
“There has been such an enormous outpouring of love from my clients,” he says, in the wake of his unspecified illness and ongoing recovery. "It's been remarkable. But there was no such outpouring from anybody at Cetera other than my regional director Harold [Nahigian], who is my friend.… I think I’m just a number to them.”
His younger partner, Trevor Cole, who ran the firm in his absence, has been pushing Thornton to drop the B-D affiliation given that most of their business is fee-based. Thornton thinks he’ll keep one for now, but maybe not with Cetera.
“We may change to another firm that would allow us to maintain all of our fee business on our own platform which would allow us to retain [more] income,” he says.
Headhunters leave messages on Thornton voice mail about three times a week, he says.
“I think what happens in an instance like this,” Thornton says, “is if people are really questioning the relationship, this provides an opportunity for people to make a move, as difficult as it might be."
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