November 5, 2013

NEXT Financial Seen as Ripe for Schorsch’s Next Big Buy

Industry expert says the rep-owned IBD could be next in the mogul’s spending spree; meanwhile, lawyers focus on Investor's Cap deal

Industry experts say there's plenty of chatter in the independent broker-dealer space about the likelihood that NEXT Financial is next on the “to buy” list of real-estate mogul Nicholas Schorsch.

Schorsch leads RCS Capital Corp., which just gobbled up independent broker-dealer Investor’s Capital (ICH), and American Realty Capital, which recently announced plans to buy Cole Real Estate Investments.  

“I spoke with someone at another IBD who was in touch with at least one [advisor] at NEXT who had mentioned the possibility of NEXT being purchased” by one of Schorsch’s firms, said Jon Henschen, president of the recruiting firm Henschen & Associates.

In September, Larry Roth — formerly head of the AIG-owned Advisor Group of IBDs — became president and CEO of Realty Capital Securities (RCS), owned by Schorsch’s RCAP Holdings. This executive appointment was made on the heels of RCAP’s purchase of another IBD, First Allied Securities, from Lovell Minnick Partners.

Talk about a lot of wheeling and dealing.

“I think the fact that Larry Roth went to [RCS to] run the broker-dealer business means we should suspect more deals are in the offering,” said consultant Chip Roame, head of Tiburon Strategic Advisors, in an interview with ThinkAdvisor.

“First Allied and Investor’s Capital got them about 2,000 reps,” Roame added. “It seems to me that they need more [reps] to have the expected impact.”

(RCAP declined to comment on the matter, and NEXT Financial did not return calls as of publication time.)

IBD Movement

Recruiters in the independent broker-dealer space say they have seen advisor movement out of NEXT, a rep-owned IBD, over the past year, as well as earlier.

This industry conjecture that NEXT was a ripe target began about two weeks ago, Henschen says, while “poaching” of its reps has been fairly aggressive for the past year. “NEXT’s sale makes sense,” the recruiter said, “as I believe the IBD is in need of capital.”

Also, for advisors who have chosen to purchase shares of the IBD, “this would present a liquidity event for their holdings,” he noted.

NEXT had 773 reps as of June, down from about 1,000 several years ago, industry experts say.

The IBD and its reps have had their share of regulatory issues. For instance, in 2009, FINRA fined NEXT $1 million for failing to supervise its 130 office of supervisory jurisdiction (or OSJ) branch managers, which resulted in clients losing about $768,000 in 2005 and 2006.

An entity run by Schorsch could buy NEXT “and then clean house, raise standards, which some firms do after they buy a BD,” said Henschen. “And they could use this issue as a way to negotiate on price.”

For the moment, Schorsch has his hands full with the Investor’s Cap purchase, which is being bombarded by lawyers investigating its sale on behalf of shareholders.

Last week, for instance, former SEC attorney Willie Briscoe of the law firm Powers Taylor said he was looking into this issue of whether shareholders are receiving “adequate compensation for their shares in the proposed sale, whether the transaction undervalues ICH stock, and whether ICH’s board attempted to obtain the highest share price for all shareholders prior to agreeing to the deal.”

Other law firms making similar moves include Levi & Korinsky, Brodsky & Smith and Joshua Lifshitz.

"We have no comment on investigations that have no basis or active inquiry," Investor's Capital said in a statement. (RCAP declined to comment on the issue.)

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