In a surprise move, Larry Roth announced he is leaving AIG's Advisor Group, with 6,000 advisors working under him, to join Realty Capital Securities, the wholesale broker/dealer and investment banking entity of American Realty Capital, the REIT sponsor. Nick Schorsch, the firm's founder, was named one of REP. magazine's 10 to Watch for 2014, on the heels of his announcement that he was acquiring independent broker/dealer First Allied. WealthManagement.com caught up with Roth to talk about why he did it, whether the move is a demotion, and about the elephant in the room—whether Schorsch's purchase of First Allied was to add shelf space for his alternative products.
WealthManagement.com: Why leave Advisor Group, and what drew you to Realty Capital?
Larry Roth: Advisor Group, and AIG generally, is in its best shape ever, so my leaving Advisor Group had nothing to do with AIG or Advisor Group. It’s 100 percent a function of the opportunity I have working with the senior people and everybody at Realty Capital Corp.
WM.com: You’re going from being the head of this large independent broker/dealer network of 6,000 advisors to being a kind of wholesale middleman for a REIT guy. Is this a step down for you?
LR: It’s not a step down at all. It’s fewer people, but it’s a totally different business model. It’s not based on number of advisors or AUM alone; it’s based on how the various companies fit together and how they add value to advisors, broker/dealers, clients and also the shareholders in the public entities.
At Realty Capital, what they’ve built is a platform which is really only the beginning of the American Realty Capital story. For example, most of the work that we’ve done historically is in the non-traded REIT area. The next step, among other things, is to build out additional product lines, outside the REIT area. The firm is also working extensively now with third parties so that the products that are being built and manufactured are not ARC products, but they’re products of other firms with other types of expertise. So that’s a big step. What’s being built at American Realty now will be a very robust platform with a wide variety of products, with a hugely talented distribution team, and we will continue to raise money across a number of firms, continue to provide liquidity events to investors, and also, where appropriate, take some of those products public. I’ve done M&A in my background, as a managing director at Berkshire Hathaway. I started my career in the wholesale distribution area, and I don’t view it as a step down at all. I view it as an opportunity to join a rockstar cast in redefining the industry.
WM.com: What is your role going to look like on a day-to-day basis, and how much freedom are you going to have in shaping your own job description?
LR: As CEO of Realty Capital Securities, I’ll be responsible for the distribution company as well as the investment bank. I’ll also be quite involved in strategy, in trying to figure out how we can build a large, sustainable distribution network that works with firms that are affiliated with ARC, like First Allied, although First Allied is not my responsibility. It’s a sister company. They’re part of our distribution strategy, but clearly most of our distribution comes currently and in the future from third parties. So we need to find better ways to work with our large and small independent distribution companies. I’ll work with the management team on identifying what kinds of products we should bring to the market, in terms of what types of various alternatives, and then distributing those alternatives. Also I will be working with the investment bank in making sure when liquidity events are appropriate that they’re executed against because that’s where a lot of money is made for the end investor. It’s really a combination of investment banking, traditional distribution management, and then b/d strategy, although again I’m not the b/d guy.
I’ve always been kind of a pain in everybody’s backside here at AIG with my Saturday and Sunday calls and emails and never knowing what time zone they’re in. But that’s kind of the culture at ARC, so I think I’m going to fit right in.
I also think this will free up some of Nick (Schorsch) and Mike’s (Weil) time, so they can do bigger and better things. I had a cup of coffee with Nick at his home about a month ago, and he looked at me and said, ‘I think you can save me six hours a week.’ For a guy like Nick, that’s meaningful.
WM.com: There’s been some rumblings of concerns over Nick Schorsch’s purchase of First Allied and whether he will now be competing with ARC’s IBD distribution partners. Will you be quelling those concerns?
LR: If you look back at the history of the independent contractor space, it’s been an industry built around private financial advisors trying to serve their clients with a variety of products. And many of the larger firms that grew up with this were either owned by or seeded by insurance companies—similar to AIG. The reason that they were in the space is that they wanted to provide a place where they could recruit and support independent financial advisors and also provide themselves some shelf space. But it was not a world-domination strategy ever.
When I sold my business a number of years ago to the ING Group, we sold a fair amount of ING product, and we also sold a lot of Jackson, Hartford, Prudential, AXA, you name it. What American Realty’s thinking is, is that it makes sense to be in the b/d space; it’s complementary to our manufacturing. It’s a great place for R&D also, because you get to spend time with advisors, ask them what they think, ask they what their clients’ needs are, and then also introduce product. But it doesn’t in any way, in my mind, conflict with the other distribution firms.
WM.com: That’s sort of the elephant in the room—the concept of having a distribution arm for your products, and some people have questioned whether that’s the motive behind buying First Allied. Are you going to be trying to get distribution through First Allied?
LR: First Allied will be one of my distribution partners, so yes. My guys and I will call on the First Allied team as wholesalers.
WM.com: I read that you’re going to have a lot of responsibility over getting distribution in the wirehouses. Is that true?
LR: The wirehouse strategy is just a part of the overall goal; it’ll be one more leg on the stool. Historically, we’ve distributed mainly through independent contractor broker/dealers. We have developed a bank channel, and we also have an RIA channel. But in the last 18 months or so, some of the larger wires have developed an interest in the non-traded REIT area, not only because of the quality of the investment opportunity but also because they take a lot of companies public so they’re also interested in finding a way to bring customers, products and then take them full cycle. It’s really the next step in growing out the distribution platform.
WM.com: Why have the wirehouses been slow to adopt non-traded REITs?
LR: I think because of the size of the firms, they just haven’t given it the attention that they could have historically. But given the needs of their clients, many of whom are getting into their retirement years, I think the wires, just like everybody else, are looking for predictable income-based products. So they started looking at real estate.
I don’t think they’re going to come in en masse. Some firms I don’t think are going to jump on the bandwagon, but many will over time.