In a rare public admission of difficulties with its advisers, RCS Capital Corp. in a court filing on Tuesday said that Cetera Financial Group was under “strain” due to RCAP's significant financial problems.
Court filings from the RCAP bankruptcy proceeding state that Cetera Financial Group's adviser headcount at the end of last year was about 9,100 financial advisers. That's down from approximately 9,500 — or 4.3% — from the number of advisers RCAP previously stated was under the Cetera Financial Group umbrella of 10 different broker-dealers.
“Cetera Financial Group has been susceptible to the financial distress at parent RCS Capital Corporation and, more recently, has experienced a strain in its financial adviser network, including with respect to recruitment and retention of key personnel,” according to the court filing. “Current industry headwinds including market volatility, recently announced proposed regulations by the Department of Labor affecting financial adviser's purported fiduciary duties to customers, and a continuing low interest rate environment have also impacted recent financial performance.”
RCAP
said on Jan. 4 that it planned to file a pre-packaged Chapter 11 bankruptcy reorganization plan at the end of January that would clean up its balance sheet by eliminating hundreds of millions of dollars in debt. Cetera would operate as a privately held company and focus solely on retail financial advice.
Eliminated would be its relationship with former nontraded real estate investment trust czar Nicholas Schorsch, who had a controlling interest in the company. His interest would be wiped out in the bankruptcy.
A company spokesman downplayed the significance of the use of the word "strain" in the court filing.
“The language in the recent RCS court filings simply contextualizes to all parties involved in the restructuring process the understandable risks to Cetera of not providing a healthy retention package to qualified advisers,” Cetera spokesman Joe Kuo said in an email.
“The balance of attrition is attributable to the elimination of insufficiently productive advisers who no longer meet basic criteria to remain in the business,” Mr. Kuo said. “Based on this context, we believe our adviser retention success continues to be strong.” He added that the decline in Cetera headcount was due to the elimination of over 200 J.P. Turner advisers as part of a previously announced closing of that firm.
Mr. Schorsch built the brokerage from 2013 to 2015 in a spending spree that included paying $1.13 billion in cash for Cetera Financial Group, which at the time consisted of four broker-dealers.
(More: How Nick Schorsch lost his mojo)
It's clear now that Mr. Schorsch overpaid for RCAP's assets. In its court filing from Tuesday, the company said that its adviser, Lazard, for the purposes of its restructuring plan, estimated an enterprise value of a reorganized RCAP to fall within a range of $475 million to $725 million, or 42% to 64% of what he paid for Cetera alone.
