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Industry Spotlight > Broker Dealers

RCS Capital’s Q4 Profits Crash on ARCP Woes

By Janet Levaux

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RCS Capital (RCAP), the parent company of Cetera Financial, said fourth-quarter revenues fell 27% to $504 million and earnings plummeted to a loss of nearly $123 million, or -$1.33 per share, vs. a loss of $1.4 million, or -$0.02 per share, a year ago as fallout from troubles at American Realty Capital (ARCP) continued.

On an adjusted basis, earnings dropped 70% to $12.6 million or $0.14 a share, compared with $42.7 million, or $0.46 a share, in Q4’13. Both adjusted earnings and revenues missed analysts’ expectations; they had forecast $0.18 in adjusted EPS and sales of $605 million in the period.

The wholesale unit said revenue from sales of nontraded REITs and other products — some of which carry the American Realty Capital brand — was $92.1 million in Q4’14, based on $946 million in total direct investment sales vs. year-ago revenues of $186.6 million on $2.1 billion in total direct investment sales. These results represent a drop of 55% in equity sales and a 51% decline in revenue tied to these sales; plus, the unit’s adjusted earnings fell 60% to a loss of $10 million.

RCS Capital shares traded down about 11% on Tuesday near $10.

Though the group says it has 1,568 active selling agreements in place, up from 1,151 deals in early 2014, the latest results clearly reflect suspensions to selling deals that mushroomed after ARCP announced $23 million of accounting errors in late October.

“Importantly, we expect the ongoing reinstatement of our selling agreements and the strengthening of our selling group will continue to be a positive contributor to our capital-raising activities,” said Realty Capital Securities CEO Bill Dwyer, in a press release.

(After ARCP’s news broke, RCAP called off plans to purchase part of Cole from its sister organization. In addition, Charles Schwab (SCHW) and Fidelity stopped sales of products associated with Nicholas Schorsch’s real estate operations. Multiple independent broker-dealers suspended sales of Cole and AR Capital nontraded REITs, including LPL Financial (LPLA), Advisor Group, National Planning Holdings, Cambridge Investment Research, Securities America and Cetera Financial. Schorsch has since given up his role as executive chairman of RCS.)

Looking ahead, the company says it should have full-year 2015 earnings of $1.43 to $1.59 a share and adjusted earnings before taxes and other adjustments of about $244 million to $268 million.

Advisor Results

On a positive note, RCS Capital says its headcount of advisors stands at 9,023, up from about 8,900 a year ago. Once the acquisitions of VSR and Girard Securities are completed, it should include about 9,500 FAs.

Cetera, which comprises RCS’ BDs, recruited 242 financial advisors in the fourth quarter with about $34 million in yearly fees and commissions. Its reps have roughly $214 billion in client assets, up 6% from last year.

For the full year, Cetera recruited 1,268 advisors with $131 million of production. It lost 1,144 advisors with $65 million of production, for a net gain of about $92.4 million.

The Retail Advice unit had fourth-quarter sales of roughly $485 million, up 6% year over year but down 4% from the prior quarter. For the full-year 2014, the group had pro forma revenue of nearly $2 billion vs. $1.7 billion in 2013, a jump of 15%. Adjusted earnings before taxes and other costs were nearly $26 million for Q4’14, down 6.5% from the year-ago quarter, “primarily due to lower commission-based revenue as well as two quarters of 2014 corporate expense allocations not previously allocated to the segment representing $5.5 million,” according to RCS.

Earnings for 2014, with adjustments, were $119 million for the full year 2014 compared with $94.9 million in 2013, up 25.5% year over year.

“We have made structural changes to the organization that create two distinct and highly strategic advantages,” said Cetera CEO Larry Roth, in a statement. “First, we have established a group of shared service functions that allow us to achieve the benefits of scale, while maintaining important, distinct advisor-facing functions that remain critical to our ability to retain and recruit advisors to the unique firms within our broker-dealer family.

“Second, we have centered the organization around delivering high-value business development and marketing programs designed to help our advisors build growing and increasingly profitable businesses,”

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