January 19, 2015
by Dan Jamieson, Financial Advisor
RCS Capital Corp.’s bankruptcy filing sounds like a bad development, but it may actually provide some relief to its embattled advisors.
The $150 million capital infusion and reorganization plan, announced at the beginning of January, provides some light at the end of what has been a long, dark tunnel for the 9,500 reps who’ve been remarkably loyal since RCS Capital (RCAP) began unraveling in 2014 after an accounting scandal surfaced at an affiliated firm.
The new money will allow the struggling holding company to restructure its debt while it goes private, as well as fund a retention deal for advisors.
Cetera Financial Group, the large network of independent broker-dealers strung together by RCAP, will become the primary focus of the new entity.
That’s good news. But the troops remain uncertain about the soon-to-be new owners and how much commitment those shareholders will have to the reconstituted firm.
For advisors at the Cetera firms, the bankruptcy filing is “a bit of a sigh of relief, but they’re also skeptical” about what the new owners will do, said Jodie Papike, executive vice president of Cross-Search, a recruiting firm.
Fortress Investment Group, Eaton Vance Management and Carlyle Investment Management have been identified as three of RCAP’s debt holders. The lenders will receive equity in lieu of debt repayment as part of the bankruptcy process.
“Bondholders are like banks — they lend not because they want to own the asset,” said one Cetera advisor who asked not to be named. The consensus among his colleagues is that the Cetera B-Ds will eventually be sold, he said.
Another problem: bankruptcy does not sound good to clients.
“We just had … three Cetera recruits visiting today,” said Arthur Cooper, co-founder of Cooper McManus, a hybrid firm in Irvine, Calif., and one of the biggest offices of Securities America.
“They’re definitely looking and being proactive about it, talking to multiple B-Ds,” Cooper said in mid-January after the bankruptcy announcement. “The number one thing they mention is they’re tired of having to create excuses about what’s going on at RCS Capital.”
“Their big concern is the uncertainty,” echoed Mike Bendix, chief executive of South Jordan, Utah-based DFPG Investments Inc. “That’s the first thing [Cetera reps] talk about.”
DFPG has picked up about a dozen Cetera reps over the past six months. Most were attracted by the DFPG’s focus on alternative investments and its internal due-diligence capability, Bendix said, something Cetera has backed away from.
Nevertheless, through all the bad news over the past year-and-half, Cetera-affiliated advisors have been surprisingly patient.
“There’s been some movement, but for the most part advisors are looking at having their backup plans ready if things go really wrong,” Papike said.
A promised retention deal — part of the restructuring plan — could help calm nerves.
“They are being presented with retention bonuses so I am not sure we will see as many reps exiting as one might expect,” said Abby Salameh, chief marketing officer at the Private Advisor Group in Morristown, N.J., a large OSJ of LPL Financial, with more than 500 advisors.
Private Advisor Group has been in discussions with “a number” of Cetera Financial advisors over the past few months, Salameh said in an email.
Recruiters think the retention package could be from 5 percent to 15 percent of trailing 12-months production, based on past deals in the independent space. The offers are usually structured as forgivable loans with three- or four-year terms.
But details of the package hadn’t been disclosed as of press time, and with RCAP struggling to pay its bills and debt holders, a generous plan may be out of the question.
“Better producers will get something,” but not all will qualify, said Jon Henschen, head of Henschen & Associates LLC, a recruiting firm.
RCAP has also kept its deferred compensation plan intact, an important step in retaining advisors, Henschen added.