Can Robert Moore save Cetera?

Cetera Financial Group’s Halloween office party this year, CEO Robert Moore dressed up as the Cowardly Lion from the “Wizard of Oz.” A more appropriate costume might have been Hercules, who famously completed 12 labors as a penance, since many observers believe Mr. Moore is facing a Herculean task as he continues trying to revive Cetera’s fortunes.

Less than two years ago, Cetera’s parent company at the time, RCS Capital Corp., filed a prearranged Chapter 11 bankruptcy reorganization. Its stockholders were wiped out, and the firm was left heavily in debt.

The independent broker-dealer network is now owned by RCS Capital’s former first and second lien holders, which include some of the most prominent names in private-equity finance, including Fortress Investment Group and Carlyle Investment Management, as well as the money manager Eaton Vance.

Those owners installed Mr. Moore as chairman in May 2016, shortly after RCS Capital emerged from bankruptcy under a different name, Aretec (Cetera spelled backwards), and announced that Cetera would be the firm’s sole business. Four months later, Mr. Moore stepped down as chairman to become CEO.

Since then, he has been working on repairing Cetera’s reputation and assuring the firm’s nearly 8,000 registered reps and advisers that the firm has a solid future. Although he’s only been running the company day-to-day for a little over a year, Mr. Moore can already point to some victories.

(More: InvestmentNews’ senior columnist Bruce Kelly talks about Mr. Moore’s performance at Cetera)

One high-profile win occurred when star broker Ron Carson, whose firm managed $1.6 billion in brokerage assets, joined Cetera in January. It must have been doubly rewarding for Mr. Moore, since he lured Mr. Carson away from LPL Financial, the industry’s biggest player and the firm that passed him over when it was looking for its next CEO. At the time he left LPL in 2015, Mr. Moore was its president and widely expected to be next in line to head up the firm after then-CEO Mark Casady retired.

Mr. Moore tweaked LPL again in September when Cathay Bank, with $507 million in brokerage assets, said it was returning its wealth management and brokerage business to Cetera. The bank had moved the business from Cetera to LPL during the bankruptcy of RCS Capital.

Apart from trying to attract new advisers, Mr. Moore has been focusing on rolling out new technology. Last November, Cetera’s computer system had to be taken down after a hardware glitch, leaving brokers with limited access to serving client accounts and managing client money for almost two days.

“Clearly, the challenges the company faced throughout the first half of last year were a distraction to our ability to make long-term enhancements to our technology platform during that time frame,” Mr. Moore said, adding that during last year’s platform shutdown, Cetera’s advisers were still able to trade and access accounts at their clearing firms.

Rebuilding the board

“With that context in mind, we believe we’ve not only addressed any past concerns related to technology, but have taken our technology architecture in a new and exciting direction that can truly help fuel the business growth and success of our advisors and institutions,” Mr. Moore said.

Mr. Moore has also been rebuilding the board of Aretec. Board additions since the reorganization include Bob Dineen, the former head of Lincoln Financial Network who replaced Mr. Moore as chairman, and Edmond Walters, the former CEO of eMoney Advisors.

Mr. Moore gets high marks, both from inside and outside the company.

“He’s leading the company in the right direction,” said Larry Ginsburg, president of Ginsburg Financial Advisors and a regional director affiliated with Cetera Advisor Networks, the largest of six broker-dealers under the Cetera Financial Group umbrella. “He’s been very receptive to feedback which I’ve given him personally, and he is focusing on the adviser experience and the experience of the client. And that’s been a real positive change.”

“I’m impressed with what they have done over the last year,” said Erica McGinnis, the former CEO of one of Cetera’s rivals, the Advisor Group. “Many people probably thought they weren’t going to make it. Robert Moore’s leadership has been very positive for the company. I know a lot of people who work over there and respect him.”

In joining Cetera, Mr. Moore was taking a calculated gamble. RCS Capital had a well-documented meltdown under the management of its founder, real estate investor Nicholas Schorsch. Mr. Schorsch bought Cetera in 2014 for $1.15 billion and added it to the family of companies he controlled through RCS Capital. But crushing debt and a high-profile accounting scandal at another Schorsch-controlled company, American Realty Capital Properties Inc., sank RCS Capital and eventually led to its bankruptcy.

A former CFO

“The financial condition of the company is something I looked at closely,” Mr. Moore said. “I was a former [chief financial officer at LPL Financial] and have a background in this type of assessment. I made a thorough review prior to my decision of joining the board as chair.”

Cetera is one of the largest independent broker-dealers in the industry. When Mr. Schorsch and RCS Capital owned it, the firm had 12 firms with 9,500 producing reps. After consolidating some of those firms and selling off assets, it has slimmed down to six independent broker-dealers and shed about 1,500 advisers.

The six firms that make up the network today — Cetera Advisor Networks, Cetera Advisors, Cetera Financial Institutions, Cetera Financial Specialists, First Allied Securities and Summit Financial Services Group — produced $1.6 billion in revenue last year, which ranks the firm as the fourth-largest in the industry behind LPL, Ameriprise Financial Services Inc. and Raymond James Financial Services Inc., according to InvestmentNews data. One of those member firms, Cetera Advisor Networks, ranks among the top 10 in the industry in revenue, producing $519.5 million in 2016. As a private company, Aretec does not report profits.

Mr. Moore said the company’s debt has been whittled down from $650 million after it emerged from bankruptcy to $625 million and is now under control. It is also sitting on more than $100 million in excess net capital, and has another $150 million in working capital that its owners provided as part of the preplanned bankruptcy. And as a retail group of broker-dealers, Cetera Financial Group doesn’t do any trading or underwriting, which are more capital-intensive and riskier businesses.

“If you told me two years ago this is where they’d be, I’d be surprised,” said Dennis Gallant, an industry consultant. “They’ve come back and have a good brand in the market with advisers and done a great job coming out of their problems and handling the debt.”

Reputational damage

“Cetera has scale, resources and infrastructure but is still trying to maintain intimacy and brands of the individual firms,” Mr. Gallant said. “That’s hard to do as you get bigger.”

While it appears to have shaken off much of the reputational damage inflicted by Mr. Schorsch, who is no longer connected to the firm, Cetera is still facing challenges. Profit margins at all broker-dealers are under pressure as the DOL fiduciary rule has led to a general decrease in commissions from the sale of high-margin products like non-traded REITs and variable annuities. Firms are merging at a rapid rate, and the industry is turning into a game of winners and losers.

But don’t look for Cetera to be inking any big deals in the immediate future. “Acquisitions themselves are not a high priority for us,” Mr. Moore said. “There is no growth better than organic.”

At the same time, Mr. Moore cited the firm’s ability and knowledge to make deals, fund acquisitions and bring in small broker-dealers as branches, or offices of supervisory jurisdiction as they are called in the industry. For example, Girard Securities, formerly a Cetera broker-dealer with 200 advisers and $8 billion in assets, said over the summer it was being absorbed by Cetera Advisor Networks, but keeping its brand and becoming its own independent branch.

Mr. Moore said Cetera has generated a good amount of interest among suitors in the marketplace, but there are no plans to put the company up for sale.

“There is an abundance of investors who wish to get involved with us, but we are not looking for a private equity firm to come buy us,” he said, adding that 98% of Aretec shareholders from the 2016 bankruptcy still own equity. He said the firm has about 125 separate investors, “and they have shown they are prepared to be patient.”

Mr. Moore also ruled out taking the company public through an initial public offering. “My strong belief is that this kind of enterprise, with advisers and end clients, has a distinct advantage in being a private company,” he said. “That allows for an investment horizon and the utilization of talent. A public company is subjected to the 90-day gauntlet of perpetually delivering and following up on very detailed finances and questions that obscure longer-term goals. It detracts from running a business that is an affiliate model for independent businesses and the clients they serve.”
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