Cetera angles to be the new leader in client engagement

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A reconstituted Cetera Financial Group, having emerged from years of turmoil, wants to set the tone among independent broker-dealers for a new generation of client-centric financial service.

"We think conditions are present for a firm to take a leadership position when it comes to the client experience," CEO Robert Moore told Financial Planning in a joint interview this week with President Adam Antoniades. The model for financial advice "is primed and ready for change. ... We don't view that as a threat to the industry. We view that as an exciting thing and a seismic shift."

Moore, once considered a likely successor to Mark Casady, the outgoing CEO of the country's largest IBD, LPL Financial, made the remark the same week that Casady announced he will retire after 14 years with LPL.

Casady's departure caps a multi-year stretch during which time LPL has contended with lackluster stock performance, regulatory issues and ongoing technology problems.

Read more: What really led to LPL exec's exit?

The entire IBD sector has been struggling for years with compressed margins, increased compliance and technology costs, as well as consumer calls for greater transparency around the commission-based business that has historically formed the core of its business model.

Cetera has nearly 9,000 advisers compared with some 14,000 at LPL.

Moore, who left LPL in March 2015, took over the top spot at Cetera on Sept. 12, replacing Larry Roth, whose departure was positioned as a break from the recent years of exceptional turbulence at Cetera.


Cetera's roller-coaster ride began in early 2014, when the private equity firm Lightyear Capital sold it to nontraded REIT kingpin Nicholas Schorsch's firm, RCS Capital, for $1.5 billion. In all, Schorsch snapped up 10 BDs in a buying spree that left much of the industry breathless. He paid top dollar to cobble together a new company out of disparate pieces.

A subsequent accounting scandal at another Schorsch-owned firm affected public perceptions of his leadership at RCS.

By spring 2016, RCS's stock collapsed to pennies per share and was delisted. The company severed its ties to Schorsch through a prepackaged bankruptcy, which restructured the firm.

"Given all of the turmoil there, you need to have some consistency in leadership and [Roth] was it," one expert says.
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Cetera has since shed two smaller BDs that Schorsch had purchased, VSR Financial Services and Investors Capital. In September it said it would offload a third, The Legacy Group, by early next year.

Moore said Cetera will continue to grow, but not likely through acquisitions. It will instead focus on organic growth and attracting new affiliated advisers.

"Cetera is a team that has come through quite a lot and has demonstrated its resiliency," Moore said, citing the firm's new board, fresh injections of investor capital and new leadership team.

"We've certainly tested the strength of our relationship with our advisers through adverse times," Antoniades added.


Moore suggested that Cetera is newly well-positioned to navigate one of the most substantial changes to face the financial services industry with the anticipated adoption of the Department of Labor's fiduciary rule, which – barring derailment by a Trump administration – begins to phase-in this spring.

The IBD is also primed to capitalize on new technologies, ranging from robo advice tools to bleeding edge software to boost advisers' EQ. Early next year some Cetera advisers will begin using facial-recognition software tools capable of reading the emotions on clients' faces as they contemplate various planning scenarios and questions.

Moore predicts it will be "transformative. ... It really moves the needle in terms of the kind of dialogue that you can engage in with a client."

Like facial-recognition software, Cetera's robo solution will be offered as part of an array of options for clients. "It's important that it be integrated," Moore said. "I don't see it as a separate and distinct offering" from other services available to clients.
Cetera does not envision any robo service putting an adviser out of work.

"When a client calls up and says, 'My father just passed away’" and there’s a large estate to transfer, he said, "that is not something you sort of plug into Siri."


While Cetera looks forward to leveraging complex technological advances, it sees an unexpected upside to one of the other challenges facing the entire industry – the tightening regulatory environment, Moore said.

The changes are likely to drive cost-savings for Cetera, which also has successfully navigated the loss of many lucrative products, such as nontraded REITs frequently sold by its advisers, he added.

"The market has already had a pretty significant correction in terms of alternative investments and higher commissionable products and we have absorbed that already," Moore said.

Antoniades noted, however, that nontraded REITS – a class of investments that some other IBDs eschew as too expensive and without sufficient counter-balancing upside – are still being sold by Cetera advisers via T shares. T shares, introduced specifically in response to new regulation of nontraded REITs, spread the same level of commissions, often more than 10%, out over time instead of charging them all upfront, which has been the norm for years.

When asked why Cetera elected to retain commissions in its retirement accounts despite some larger players such as JPMorgan Chase and Merrill Lynch discontinuing their use, Moore said that commissions still have a place.

"There are situations where a commission-based activity is in a client's best interest," Moore said.

He pointed out that Cetera does not have other lines of business such as banking services to offer. "All that says is that we are different."


One industry consultant believes retaining commissions in retirement accounts was the wrong response to the fiduciary rule.

“Cetera missed the opportunity to make a stand," Tim Welsh of Nexus Strategy said.

But the IBD still has a chance to capitalize on this halcyon period, as the recent bad years are still fading in the rear-view mirror, he said.

"Despite the overwhelming bad news facing IBDs in general," Welsh said, "they have a brief moment in time to prove their self-worth in resurrection mode. But, if it doesn't translate into short-term results, they will be in a world of hurt."

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Independent BDs Financial regulations Compliance Financial planning M&A Technology Robert Moore Mark Casady Larry Roth Nicholas Schorsch Cetera Financial Group LPL Financial Lightyear Capital RCS Capital Merrill Lynch JPMorgan Chase