Nick Schorsch has been snapping up broker-dealers with the fervor of Carrie Bradshaw from “Sex and the City” chasing down her next pair of Manolo Blahniks.
But last Friday, Mr. Schorsch's latest deal sounded an odd note to some, as if Carrie announced to her BFFs that she had bought her latest pair of pumps on the streets of Chinatown instead of Barneys.
That's when RCS Capital Corp., of which Mr. Schorsch is chairman, said it intended to acquire for $27 million in cash and stock J.P. Turner & Co., which in the past has focused on brokers that have highly transactional books of business. That means reps generate commission dollars through trading client accounts, not fees from long-term financial advice for clients.
The independent-broker-dealer industry has steadily moved away from the stock-jockey business model to representatives and advisers who generate fees from buying and holding investments or giving advice.
Based on the firm's history with the Financial Industry Regulatory Authority Inc., the Securities and Exchange Commission and the plaintiff's bar, the question is, if Mr. Schorsch is building a top-tier network of independent broker-dealers, why buy J.P. Turner?
Since June, Mr. Schorsch, through RCAP Holdings and RCS Capital Corp., has been on a buying binge. He has announced five such deals involving firms with 9,200 reps and advisers producing about $1.7 billion in annual fees and commissions. Once those deals are completed, the Schorsch network will rival industry giants LPL Financial and Ameriprise Financial Services Inc.
RCS Capital and Mr. Schorsch last Thursday scored their biggest, shiniest prize, announcing an agreement to acquire Cetera Financial Group Inc., with four broker-dealers and home to 6,600 advisers, for $1.15 billion in cash from Lightyear Capital.
A day later, RCS Capital said it agreed to buy J.P. Turner
J.P. Turner's reputation as a home to transactional brokers who run into trouble with regulators and clients is buttressed by recent actions by Finra and the SEC.
The Financial Industry Regulatory Authority Inc. in December ordered J.P Turner to pay more than $700,000 in restitution to clients who complained about unsuitable sales of leveraged and inverse exchange-traded funds and excessive mutual fund switching by one registered representative.
And the Securities and Exchange Commission in 2012 alleged that three former brokers at J.P. Turner churned client accounts and racked up more than three-quarters of a million dollars in commissions and fees for themselves and the brokerage. The brokers generated commissions, fees and margin interest totaling $845,000, while the customers lost $2.7 million, according to an SEC administrative complaint.
A review of J.P. Turner's roster of about 370 registered reps and advisers reveals that scads once worked at GunnAllen Financial Inc., a notorious independent broker-dealer that collapsed in 2010 under the crushing weight of paying to fight investor complaints involving a rogue broker, Frank Bluestein, and $40 million in sales of a fraudulent private placement, Provident Royalties.
“I have brought at least a half-dozen investor claims against J.P. Turner since the crash,” said plaintiff's attorney Lars Soreide. Those claims have been based on allegations that a J.P. Turner broker used excessive margin in a client's account or churning an account, he said.
In one current Finra arbitration claim, the J.P. Turner broker lost $180,000 by trading stocks in the account of a woman in her 70s, while charging commissions of $170,000, Mr. Soreide said. “There's just a lot of claims out there where [J.P. Turner reps] are doing this to a lot of people,” he said.
J.P. Turner's recent character, however, appears to be more nuanced than these regulatory actions and investor claims, most of which are based on events that happened several years ago.
J.P. Turner has been cutting back on reps with “disclosure events” on the BrokerCheck reports. The firm said adios to nine such brokers recently, most of them at the end of last year, reducing the number of reps with such disclosures to 85. Those knocks on a broker's record can range from pending investor complaints about an unsuitable variable annuity sale to an IRS tax lien. Reducing the number of reps with such dings on their BrokerCheck reports looks like J.P. Turner is trying to clean up its image.
And many of these disclosure events on the 85 reps' BrokerCheck reports are from bygone eras in the securities business. Some are 10, 20 or 30 years old. Black Monday from 1987 and the tech stock crash of 2000 caught many investors, along with their brokers, on the wrong sides of trades. While a crash or sharp market correction does not excuse a rep's failed stock pick or strategy with a client, a spike in investor complaints against brokers invariably will accompany a market crash, particularly if the broker is a stock jockey.
Finally, J.P. Turner appears not to have a true “rogue rep” under its roof, and Finra is keeping its focus on such brokers. Last month, former broker to the stars Bambi Holzer agreed to a settlement with Finra that barred her from the securities industry. She had 72 disclosure events and a BrokerCheck report of 116 pages. No J.P. Turner reps' profile on the Finra database comes close to such an alarming history in the securities business.
J.P. Turner spokeswoman Heidi Wheatley said that the firm doesn't deserve the reputation that some in the industry believe it to have. The problems with churning and excessive trading are from several years ago, although regulators are just now getting around to leveling sanctions, she pointed out. The firm is “accountable to the investors,” Ms. Wheatley said. “We are supporting reps doing good business and always in the interest of their clients,” she said.
Mr. Schorsch said that J.P. Turner had been working diligently over the past few years to clean up its act, including hiring outside oversight and compliance consultants and jettisoning problematic brokers. None of the regulatory problems at J.P. Turner involved the sale of nontraded real estate investment trusts, the product that Mr. Schorsch's real estate company, American Realty Capital, has produced in the past. He noted that regulators also fined a number of big name firms in 2013.
In fact, J.P. Turner has become more productive. Its asset under management in 2013 were $4.3 billion, according to an RCS Capital investor presentation. That's an increase of 30% since 2011 when the firm had $3.3 billion in assets, according to InvestmentNews data. And that increase in assets comes with almost 200 fewer registered reps than the firm had in 2011.
“It's a fine firm that's growing and growing organically,” Mr. Schorsch said. “It's making the clients money. That's the thing we look for.”
Like Carrie Bradshaw shoe shopping in Chinatown, perhaps Mr. Schorsch has found a bargain with J.P. Turner.