August 11, 2015
By Janet Levaux, ThinkAdvisor
The firm’s stock has plummeted 80% this year; the reorganization news isn’t helping
Shares of RCS Capital (RCAP) continue to weaken in the wake of its announcement on Thursday that it is selling its troubled wholesale distribution unit to Apollo Global Management (APO) for $25 million and forming AR Global Investments, which will be owned 60% by Apollo and 40% by RCAP.
Investors and analysts are not happy. The stock is down over 80% year to date. It fell about 9% on Tuesday to close at $2.36, after dropping 30% on Monday.
When the company–which includes Cetera Financial Group, 11 broker-dealers and 9,500 advisors–shared its recent earnings and reorganization news on Thursday, its shares also declined about 30% to about $4.25. (It hit a two-year high of about $39.50 in early-April 2014.)
Given the plummeting share price and concerns about where the company is headed, recruiters say the burden is on Cetera management to retain advisors. Recruiting, they add, is not likely to prove very successful at this time.
“This should most definitely hurt their recruiting efforts and could cause defections,” said executive-search consultant Mark Elzweig, in an interview. “When a company’s stock plummets, advisors and investors become alarmed.”
Citigroup analyst William Katz downgraded RCS Capital shares to “neutral” from “buy” on Monday. “We see three key issues for the stock in the intermediate term … liquidity, debt covenant coverage and potentially the need to raise equity,” Katz said in a report obtained by Reuters.
For its part, Cetera Financial–led by Larry Roth, the former head of the AIG Advisor Group–insists that it remains confident.
In the second quarter, when RCS reported a 65% year-over-year drop in its sales of alternative products, Cetera’s “retention rates were approximately 98%, and we have a robust pipeline of potential advisor recruits,” Joseph Kuo, a spokesperson said in a statement. “Financial advisors continue to recognize the significant value the Cetera Financial Group network offers in delivering industry-leading resources, technology and tools through unique broker-dealers that each offer a highly personalized culture of service and support for their advisors.”
“So far they have been pretty successful at retaining reps and have not lost that many,” Elzweig said. “But I don’t believe they are now offering retention deals and instead are focused on adding capabilities and resources for advisors.”
In late-July, Cetera Financial began closing down J.P. Turner, an independent broker-dealer it acquired in 2014, mainly due to issues regarding its main clearing partner.
“Whenever there is any kind of uncertainty, advisors pause and wait to see what happens – i.e., to see about any cost cutting, if any constituent BDs will be merged and what that will look like,” Elzweig added. “When a firm is in flux, it’s not prudent for advisors to join it.”
“Bad press can have a poisoning effect on people who are likely to join and who are looking for stability,” explained recruiter Jon Henschen, in an interview.
With the sale of the wholesale-distribution unit, what comes next? “I hear they are going to cut costs–there will be consolidation. These are rarely positives for the [existing] reps,” Henschen said.
Meanwhile, the pressure in on RCS Capital and Cetera financial management. “The cracks in the damn are getting larger,” the recruited added. “It’s going to take more effort on their part to shore it up.”