For better or worse, RCS Capital is going for a new look after a series of bombshells accompanied its disappointing second-quarter earnings:

  • The beleaguered financial services holding company is selling its wholesale distribution division to Apollo Global Management, an alternative investment management firm, for $25 million in cash.
  • RCS, whose properties include Cetera Financial Group, the industry's largest independent broker-dealer network, is also getting a cash infusion of  $37.5 million in newly issued preferred stock from Apollo,($25 million), and New York-based hedge fund Luxor Capital Group, ($12.5 million).The company says it will "re-focus" its business on Cetera, which will enter into a "strategic relationship" with Apollo to offer that firm's sponsored alternative investment products.
  • RCS will also be looking for a new chief executive officer and chief financial officer to replace Michael Weill and Brian Jones, respectively. Weill and Jones will stay on until replacements are found.
  • The company's board of directors is forming a committee to "explore further options" to boost RCS' retail advice business. As Cetera CEO Larry Roth put it in a conference call to analysts, "This is just the first round."


RCS reported a loss of $66 million, or $1.11 per share, and a 23% decline in revenue to $678 million for the quarter ending June 30.

Net new advisory assets, a key metric in the advisor industry, plunged 42% to $614 million, down from slightly over $1 billion for the same period last year.

RCS' wholesale distribution numbers also nose-dived, compared to the second quarter in 2014. Equity sales sank 65% to $1.3 billion, revenue tumbled 67% to $107 billion and adjusted EBITDA posted a loss of $5.4 million, a stunning reversal of 140% from the same period last year.

The stock market's verdict was clear: RCS stock lost nearly one-third of its value in Thursday's trading, closing at $4.25 a share, a loss of over 80% from its yearly high.


"We are disappointed with our second quarter results," Weil said in a company statement. Heblamed "a challenging market environment" and "the impact of company-specific initiatives."

More specifically, Weil and Roth cited delays in hoped-for broker-dealer integration initiatives, soft commission sales, a pull-back in direct-placement sales and the ill-starred performance of the wholesale division as major reasons for the company's poor earnings showing.

News of the sale and executive shakeup drew mixed reviews. Some industry observers thought it might tarnish RCS' luster, while Cetera advisors believed separating from the wholesale division was a step in the right direction.

"I think the more change and uncertainty that seems to follow and hover over RCS, Cetera and their various related companies, the more it will negatively impact recruiting and retention," says  Howard Diamond, chief operating office for Diamond Consulting, an industry consulting and recruiting firm.

Financial advisors and their clients loathe uncertainty.  The more that advisors who were thinking about joining a firm read about the various changes and upheavals within a firm, the less inclined they will be to join that firm."

But Dan May, the CEO of AdvisorNet Financial in Dellwood, Minn., which is part of the Cetera Advisor Networks, says selling the wholesale division is a good thing because it addresses a misconception that RCS Capital brokers are pushing product.

"We like the separation, because we think we are financial advisors who are good at what we do. The last thing we see ourselves as is Wall Street brokers pushing products," May says. "I really think that's the perception.

"We think this is a really good move," he adds. We think that will help clarify what RCAP is all about. We're not there for Nick [Schorsch] to sell product."

Indeed, one Cetera regional director says he and other Cetera advisors began asking RCS to sell off its wholesale division some time ago.

"We've made the company aware of this," says Dave Hubbard, president of Exemplar Financial Network in Crystal Lake, IL. "As independent financial advisors, we value our independence and we really didn't like having anybody think that we were influenced by a product wholesaling. With the downturn in sales, the wholesaling operation became a real drag on earnings. I think since that time, there have been a whole lot of financial advisors and retail directors and others like myself who had hoped for some type of separation."


During a conference call with analysts, Weil made clear that a driving catalyst for RCS's big moves was a desire to boost the company's stock price towards a valuation "in line with our peers…We want to close the gap between our current trading price and the company's inherent value."

Weil described the sale of the wholesale division and the equity investments by Apollo and Luxor as "a key milestone in our effort to streamline and focus our business on the independent retail advice business."

Roth maintained that the long-term future of Cetera and the retail advisory business was "fundamentally strong," citing strong retention and recruiting numbers bolstering the company's 9,500 independent advisors, the industry's shift to fee-based advice and an expected comeback of commission-backed sales. "I'm happy with our market position," he said.

RCS also announced that Marc Rowan, co-founder of Apollo, and Anthony Civale, lead partner and COO of Apollo Credit, will join the RCS Capital board of directors, as Brian Jones steps down.

In addition, RCS Capital and RCS Capital Management agreed to terminate an external management services agreement.RCS' governance structure.

Additional reporting by Ann Marsh

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