Independent brokerage ekes out profit, replaces top executive

NEW YORK Wed May 14, 2014 7:30pm EDT

NEW YORK May 14 (Reuters) - RCS Capital Corp, the new owner of the fastest-growing independent brokerage business in the securities industry, disclosed on Wednesday just how skinny profits in that business are.

Cetera Financial Group, which RCS bought two weeks ago for about $1.2 billion, eked out net income of $991,000 in the first quarter on revenue of $301.2 million. It lost $545,000 in the prior quarter, RCS said in regulatory filings detailing three purchases it expects to complete this quarter.

The numbers may explain a management shakeup that RCS announced at Cetera on Tuesday. RCS elevated veteran independent brokerage executive Lawrence (Larry) Roth to chief executive to replace Valerie Brown.

"Ms. Brown believes now is the right time for her to transition from her role as CEO of Cetera into a consulting role with Cetera and on to other pursuits," RCS President Michael Weil said in a prepared statement.

Brown, who oversaw about 6,800 brokers in 4,544 offices at Cetera's three brokerage units, could not be reached for comment.

RCS Capital Executive Chairman Nicholas Schorsch also owns AR Capital, which sponsors and advises private real estate investment trusts, lease programs and other nontraditional investments sold through independent brokerage firms. His decision to replace Brown took some insiders by surprise since he had repeatedly praised Brown's talents since announcing plans to buy Cetera last year.

Some competitors who asked for anonymity said Brown opposed selling many AR Capital products to Cetera's relatively unsophisticated "mass affluent" investors, which it defines as those with $100,000 to $1 million of investable assets.

In a filing on the planned acquisitions on Wednesday, the company said: "RCAP will offer financial advice and investment solutions to mass affluent investors with investment needs that are not served by the offerings and capabilities of captive investment advisers and broker-dealers."

RCS plans to buy three additional broker-dealers by the end of this quarter - J.P. Turner & Co, Summit Financial Services Group and Investors Capital Holdings - and last year paid $177 million for First Allied Securities, an independent firm with almost 1,200 brokers.

Each firm will operate autonomously under its own name, and brokers will be able to choose the products they sell, RCS said in its filings. But the firms will be supervised at the top by Roth, whose title is CEO of Cetera Financial Group and who was hired by RCS last summer to expand distribution of investment products.

When the new acquisitions are complete, RCS will be the second largest independent brokerage network in the U.S., after LPL Financial Holdings. On a pro forma basis, it would have had about 9,100 financial advisers with 1.9 million clients and $208.3 billion of client assets as of March 31, the filings on the proposed acquisitions said.

Cetera, the largest of the group, has about $152 billion of client assets under administration.

Brokers at independent brokerage firms are contract employees, meaning they buy investment products, marketing and regulatory services from the firm and pay for much of their overhead. They retain an average of about 89 percent of the fees and commissions they collect from clients, in contrast to the 40 percent to 50 percent payout that top advisers keep at firms such as Bank of America's Merrill Lynch, Wells Fargo & Co's Wells Fargo Advisors and UBS Wealth Management Americas .

The high payout explains why profit margins at independent broker/dealers are much narrower than those of traditional firms.

RCS expects to report a first-quarter profit of $12.7 million, down from $33.9 million in the fourth quarter, according to the filings. It has been paying a dividend of 18 cents a share but will suspend the payout for the foreseeable future because of restrictive agreements on use of its revenue dictated by banks and other lenders that financed its purchase of Cetera.

RCS, whose shares have ranged from $14.86 to $39.98 since it went public last summer, rose 14 cents to $33.15 in Wednesday trading. (Reporting By Jed Horowitz; Editing by Steve Orlofsky)