RCS Capital's (RCAP) CEO Bill Kahane on Q2 2014 Results - Earnings Call Transcript

| About: RCS Capital (RCAP)

RCS Capital Corporation (NYSE:RCAP)

Q2 2014 Earnings Conference Call

August 7, 2014 1:00 p.m. ET


Andy Backman - Managing Director of IR & Public Relations

Bill Kahane - CEO

Mike Weil - President

Larry Roth - CEO of Cetera Financial Group

Brian Nygaard - COO

Brian Jones - CFO


Devin Ryan - JMP Securities

Kenneth Hill - Barclays

Michael Carrier - Bank of America Merrill Lynch

Michael Finkelberg - Luxor


Good afternoon and welcome to the RCS Capital Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this call is being recorded.

I'd now like to turn the conference over to Mr. Andy Backman, Managing Director of Investor Relations and Public Relations. Please go ahead.

Andy Backman

Thank you, Andrew, and good afternoon everyone. Thanks for joining us today to review RCS Capital second quarter 2014 earnings report.

With me today are Bill Kahane, RCAP's Chief Executive Officer; Michael Weil, President; Larry Roth, CEO of Cetera Financial Group, Brian Nygaard, RCAP's Chief Operating Officer; and Brian Jones, RCAP's Chief Financial Officer.

This afternoon's call is being webcast on our Web site at rcscapital.com in the Investor Relation section as well you'll find the link in a presentation that will be filed this morning, which will be used in concurrence with today's call. There will be a replay of the call beginning at 2 p.m. Eastern Time today. Dial in for the replay is 1877-344-7529, with the confirmation code of 10048924.

Before I turn the call over to Bill, I'd like to remind everyone that statements in this earnings call which are not historical facts will be forward-looking. RCS Capital's actual results may differ materially from these forward-looking statements and the risk factors that could cause these differences are detailed in our SEC reports.

In addition, as stated more fully in our SEC reports, RCS Capital disclaims any intend or obligation to update these forward-looking statements except as expressly required by law.

Let me review the format for today's call. First, Bill and Mike will provide comments on the business, and an update on our key corporate initiatives, including the Broker-Dealer acquisition we announced yesterday, as well as the overall performance in the second quarter. Larry Roth and Brian Nygaard will then discuss our Retail Advice business as well as provide an update on the integration of our acquired Retail Broker-Dealer businesses.

And finally, before turning the call over to Brian Jones to preview the financials, Mike will discuss our wholesale distribution business as well as some of newer initiative, including our recently announced crowdfunding platform, "We R Crowdfunding."

Now, I'd like to turn the call over to RCAP's Chief Executive Officer, Bill Kahane. Bill?

Bill Kahane

Thanks, Andy, and good afternoon everyone. Let me begin by saying that we're extremely pleased with our operating results for the second quarter. As evidenced by solid performance across all of our key reporting segments, including our legacy wholesale distribution and investment banking and capital markets businesses as well as our more recent initiatives in independent retail advice and investment management, all of which focus on the retail investor.

We again made tremendous progress during the quarter building on the momentum we discussed with you last quarter, and we continue to redefine the practice of retail investing. We posted strong earnings for the quarter as a result of solid performance in each of our businesses.

Our wholesale distribution business raised $2.6 billion for the second quarter, an increase of $1 billion or 63% over last quarter, and a 26% increase over the second quarter last year. We continue to see that momentum in July with nearly $1 billion raised for the month, for a total of $5.2 billion raised year-to-date through July. We expect our previously announced acquisition of Strategic Capital to close later this month, which will further enhance our distribution capabilities, including Strat Cap we'll have 31 products in distribution or offering, with total registered equity value of approximately $40 billion or more than 3.4 years of current offerings in inventory.

We continue to demonstrate our market-leading position as the largest wholesaler of non-traded REITs and other direct investment programs. According to Robert A. Stanger's June Market Pulse report, RCS Capital possessed 46% market share of year-to-date June 2014 non-traded REIT sales. This market share was more than two times the next two competitors combined.

In addition, RCAP distributed the top three non-traded REITs for the second quarter, and four out of the top five selling non-traded products.

Our investment banking and capital markets business posted strong results as well, driven by three new funds launched, three public listings of direct investment products and two other transactions during the quarter. We continued our leadership in real estate M&A and presently sit at the top of the 2014 lead tables with more than $11 billion in first half transactions announced or completed.

With respect to our newer lines of business, we completed all five of our previously announced Broker-Dealer Advice acquisitions ahead of schedule, and the integration of these companies is ahead of plan. Given the hard work of the team, we're firmly on track to realize the anticipated 2014 run rate revenue and expense synergies we projected with additional incremental synergies expected in 2015.

More importantly we've added these businesses with minimal operating disruptions retaining more than 97% of our advices based on Gross Dealer Concession since the acquisitions were announced and are growing these businesses ahead of our internal projections.

During the quarter, Retail Advice Assets Under Administration increased nearly $6 billion or 3%, and are currently at $214.2 billion of AUA. We continue to focus on growth opportunities for the retail advice segment, and announced yesterday the addition of 264 independent advisors and over $12 billion in assets under administration from VSR Group, one of the most productive and highly regarded independent broker dealers in the United States.

At the end of June, we closed our acquisition of the Hatteras Funds Group, a leader in the liquid alternative space further diversifying our revenue sources, while increasing distribution channels to support continued and future growth. Since we announced the acquisition of Hatteras on October 2013, assets under administration have grown more than 29% to approximately $2.8 billion as of June 30th, which is well ahead of our internal projections.

Meanwhile, SK Research, our leading direct investment research team has experienced a very warm welcome from the industry and is expected to reach substantial profitability in the third quarter of this year more than two quarters ahead of our initial projections.

And finally, we completed a $453 million follow-on common stock offering, which strengthened our balance sheet, provided additional growth capital for the firm and increased our public floating liquidity. We welcome our new investors, and we remain committed to driving long-term value for all our shareholders.

These achievements illustrate our team's success during the quarter in operating and integrating our several lines of business. We believe the vision we presented to our shareholders in January just seven short months ago has largely come into clear focus.

With those initial comments, let me turn the call over to Mike.

Mike Weil

Thank you, Bill, and good afternoon everyone. It was a great quarter and a busy quarter for RCS Capital. All of our business units are performing extremely well and achieved greater than anticipated results as evidenced by our record earnings.

Pro forma adjusted net income and pro forma adjusted EBITDA were both up 12% quarter-over-quarter. It's important to note that given the timing of the closing of our Retail Broker-Dealer acquisition, most of which occurred in the second half of the quarter, our EBITDA and net income figures do not include any benefit of our projected $57 million to $65 million of annualized synergies. So, our $72 million of adjusted EBITDA for the quarter is really quite a strong number, and demonstrates the leverage we have in the cost side of the business when we deliver a strong revenue quarter like this one.

Larry will talk more about the synergies later, but it's a surprise to say we're right on track to deliver those incremental earnings by year end.

Total retail advice revenue was up 7% to $495 million, driven by strong organic growth across all revenue categories, and AUA was up $5.9 billion or 3%.

Our wholesale distribution business raised $2.6 billion in the quarter, up $1 billion or 63% from the first quarter. Total equity raised for the first six months was $4.2 billion and $5.2 billion through the end of July. We remain confident in achieving $12 billion in total equity sales for the full year and $14 billion, including the addition of strategic capital.

Our investment banking and capital markets business, which includes investment banking, transaction management and/or transfer agent business increased 320% year-over-year to $39.1 million for the second quarter and with $87.6 million for the first six months. Brian Jones will discuss in greater detail the drivers of what was a great quarter for this business.

Our investment management business, which includes the Hatteras Funds Group that closed on June 30th, reported $15.7 million in revenue for the quarter and currently has $2.8 billion in assets under management.

Our rock solid balance sheet provides ample dry powder to continue to selectively add to our franchise in ways that maximize value to our shareholders with $475 million in cash, net leverage of less than 1.5 times and approximately $187 million of annualized free cash flow before debt amortization.

We have substantial resources available to executive accretive acquisitions, including smaller tuck-in transactions like the acquisition of VSR Group we announced yesterday, as well as strategic technology plays like our recently announced acquisition of Trupoly.

As Bill mentioned, we completed a number of truly transformational broker dealer transactions this quarter, ahead of schedule firmly positioning RCAP as the second largest U.S. independent advice network and the largest wholesaler of non-traded REITs and other direct investment programs.

We're pleased to welcome Cetera Financial Group, First Allied Securities, Investor Capital Corp, J.P. Turner, Summit Financial and Hatteras Funds to the RCS family, and we look forward to closing our previously announced acquisition of Strategic Capital later this month, as well as the acquisition of VSR Group during the second half of the year.

The acquisition of VSR is an excellent example of how we are approaching growth through smaller tuck-in acquisitions. Specifically, identifying and executing strategic acquisitions of independent firms that are well positioned for accelerated growth from recruiting and organic revenue expansion if provided with the right resources.

VSR Group acquisition meets these criteria with a very talented leadership team and an extremely productive and loyal advisor community that the firm supports across the country. As with all of our member firms, Cetera Financial Group will deliver to VSR all of the benefits of scale at the network level combined with a support of their unique culture and brand.

All of our acquired retail broker dealer companies are high performing; high quality firms that position us well to leverage the long-term opportunities in the market. We've added experienced improving leaders to our team and significant technological and investment management advantages that provide us with unique capabilities and expertise. These acquisitions are an important part of our platform as we create more diverse and recurring revenue streams by providing a full breadth of services and support to our independent advisors as well as a broad suite of investment solutions to our retail investors.

Importantly, the integration of these companies is ahead of expectations. And we are very confident that we will realize the anticipated 57 million to 65 million of run rate revenue and expense synergies by year end. With incremental synergies expected in 2015, Larry Roth and Brian Nygaard with their teams are all doing a terrific job in advancing the various initiatives that will allow us to achieve the synergies we expect.

With that, let me turn it over to Larry and Brian to review the retail advice business and provide additional details on the integration process and expected synergies. I'll then come back and discuss our wholesale business and some of the initiatives we are launching. Larry?

Larry Roth

Thanks, Mike. Good afternoon, everyone. It's a pleasure to be with you today, and I am very happy to be able to report such a strong quarter for our retail advice platform. Since taking the realms of the retail advice business three months ago, I couldn't be more pleased with the progress the entire team has made on multiple fronts. We have one of the most experienced senior management teams in the business and a dedicated and passionate group of employees coming together to achieve our objectives. Together we are building what is becoming an industry leading platform with unique capabilities and clear competitive advantages. And we are extremely pleased with the performance of integration within the platform to-date.

As both Bill and Mike mentioned, we closed all five of our retail broker dealer acquisitions ahead of schedule. As a result we currently have 9200 financial advisors on the platform serving over 2 million clients with $214 billion of assets under administration, which is an increase of 5.9 billion for the first quarter. The acquisitions of VSR Group will contribute an additional 12 billion of assets under administration and 264 producing advisors with an industry leading average production of $380,000 and an average tenure of almost 11 years with the firm.

Strong organic growth during the quarter generated sequential revenue increases across all revenue categories combined with our continued focus on expense controls, this revenue growth resulted in EBITDA margin expansion from 1.5% in the first quarter to 6.5% in the second quarter.

Turning to recruiting and retention, during the quarter we recruited 272 financial advisors, which represents 24.2 million of GDC. On a net basis we added 34 advisors bringing the total as I mentioned earlier to 9200. It's clear that advisors across the platform are receptive to RCAP's value proposition, namely, helping drive overall business growth to industry leading and proven training, education and technology, multiple clearing alternatives, a choice of individual firms with which you affiliate and a diverse portfolio of traditional managed as well as alternative investment programs to offer their products.

As President of Cetera Financial Group, Adam Antoniades is working with the CEOs of each of our companies helping them to improve advisor retention and productivity as we look to grow their businesses. In addition, Adam is working directly with me and Sheila Woelfel in developing and executing our strategic partner revenue programs. Sheila recently joined our firm after five years at AIG and 15 years prior at LPO Financials.

As we look at the overall results of the advisor landscape, we are finding that advisors require greater levels of support to grow their businesses and serve their clients as investing has become more complex. Investors are seeking more specialized products. They also have achieved specific financial goals. And we are extremely well positioned to meet those needs.

Our platform is designed to deliver world class advisor and client service. We provide access to an incredibly diverse investment product suite, we offer a robust technology platform and provide several training and education programs. Also it goes with that saying that we have a strong complaint infrastructure to address the advisor needs. In fact our continued investment in technology in the use of sophisticated proprietary supervisory processes and procedures provides clear5 advantages including significant regulatory compliance benefits as well as a positive impact on earnings.

Now, let me walk through the performance of the business for the quarter. Total retail revenues for the second quarter were $494.5 million on a pro-forma basis compared to $464.3 million in Q1. Recurring revenue represented 56% of the total revenue for the quarter with approximately 27% from our fee based advisor accounts and the remainder from commission trails, asset based fees including strategic partner revenue and other recurring sources including advisor affiliation fees, IRA fees etcetera.

Looking at revenues on a more granular basis, commission-based revenues, which includes both transactional commissions and trials increased to $310.1 million versus $283.9 million in the prior quarter from a combination of net advisor growth, increased -- find assets under administration and higher trading volume. Commission based revenue for the six-month period was $594 million. Transactional commissions increased 5% from 181 million to 191 million for the quarter with favorable market conditions which generated higher levels of transactional volumes. Trail revenue increased 16% from $103 million to $120 million.

Advisory fees and service revenues which includes client advisory fees and administrative fees on client accounts represented 27% of retail revenue and a total of $135.5 million for the second quarter versus $134.5 million for the prior quarter. We expect advisor revenues to continue to grow with the increasing utilization of the company's wealth management platforms. It is also worth noting that because advisory fees are built quarterly in advance, market appreciation in any given quarter will not be reflected to the following quarter.

Asset based fee revenue which includes strategic partner cash suite and mutual fund fee revenue was $14.8 million for the quarter driven by the continued focus on leveraging our platform strength and scale to further drive additional revenue from our strategic partners. While we've made a lot of progress with our strategic partner discussions we would expect to see the meaningful impacts from those discussions and the associated synergies fully in place on a run rate basis by the end of 2014.

Transaction based and other revenue which includes ticket and other trading charges, advisor fees and other account fees including IRA fees increased 7% to $34.1 million driven by increased transaction volumes particularly in alternative products and more generally favorable market conditions.

We increased retail advice EBITDA margins 110 basis points sequentially from the first quarter. With incremental EBITDA margins of 28%, we expect margins will continue to expand at a healthy rate in the coming quarters as our synergies begin to roll in; the synergies alone providing approximately 300 basis points of margin expansion from current levels.

Over the longer term margins will continue to grow and approach those of our larger competitors. As we benefit from short-term interest rates, the cost savings from our scale and we continue to deliver to our advisors, and the natural margin levels our organic growth.

The company's average cash suite balances for the second quarter were $7.6 billion which is essentially in line with the prior quarter. As a result of the current low interest rate climate approximately 4% of our client assets under administration are help in sweep accounts, the majority of which are main market vehicles. This compares to approximately 8% on a historical basis. Cash sweep balances currently earned approximately 10 basis points on average. These money market funds are currently in waivers, meaning that fund sponsors are not collecting all of their expenses.

As interest rates rise, fund providers will initially seek to restore their expenses. We estimate that we will realize between 60% and 80% of any benefit as the expense ratios are restored. During a return to historic cash levels, a 100 basis point increase in money market rates has the potential to provide approximately $45 million to $120 million in annual EBITDA improvement. Relative to some of our peers, we would anticipate being able to benefit more quickly from an increase in rates as our deposits are not tied up in any particular third-party program or agreements.

Our platform continues to grow and diversify, and under Brian Nygaard's leadership, we are well on our way to meet our anticipated 57 million to 65 million in 215 run rate synergies. Brian will provide a more specific update on the integration. But I'll assume closing that while we're still in the early innings, we are very pleased with the performance in the business and we anticipate continued positive momentum as we further execute our plan. Advisory to close the platform are responding to our selling proposition which again is designed to help them grow their businesses.

Let it turn it over to Brian Nygaard who as I mentioned is leading our integration now. Brian?

Brian Nygaard

Thanks, Larry. It's good to be here with all of you this afternoon. As you've now heard, the integration of our acquired broker dealers is going extremely well and we are on track to achieve our projected synergies.

Primary synergy components include Strategic Partner and Wealth Management Platform Revenue Synergies, as well as expense synergies associated with back office management, technology consolidation and improved clearing the platform economic. The largest of the revenue synergy opportunities representing between $27 million and $30 million annually comes from our Strategic Partner relationships. The scale and reach of our network of broker dealers allows us to fundamentally improve our Strategic Partner relationships which include the leading sponsors of mutual funds, annuities and alternative products resulting in greater revenue opportunities as compared with when the firms operated independently.

To-date, we've had constructive discussions with most of our strategic partners and we remain highly confident in achieving these synergies on a run rate basis for 2015. We do believe there are additional and incremental Strategic Partner revenue opportunities, but as Mike said, it's too early to quantify the level and timing of those incremental improvements.

Second largest in terms of synergy contribution between $12 million and $15 million, our wealth management and other platform fees with an increased penetration of our high value and market leading wealth management offering into our firms that presently outsource this service. A portion of these revenues will be realized through compensable client advisory fees. However, the administrative fees which generally range from 10 to 45 basis points on assets in non-compensable, and therefore helps to accelerate margin expansion.

As an example, we are now planning the roll out of two new fee based platforms, one from First Allied, the other from Cetera, the other broker dealer platforms. We expect to roll out a variety of additional product and service offerings as well, feature which is designed to improve our financial advisors client service capabilities. These include such things as business consulting, improved access to events based market support along with expanded product research and portfolio design assistance. While it does take time to develop and roll out these programs, we remain confident based on the work we've done thus far and our ability to achieve these synergies.

The balance of the anticipated $18 million to $20 million of synergies will come from back office management, technology efficiencies and the restructuring of our current contracts including our contract with Pershing, as well as the elimination of certain duplicative public company expenses. These projected synergies are also on track. While we've made great strives in integrating these high performing companies thus far, there is still more work to be done and I look forward to reporting additional progress on future calls.

Let me now turn it back to Mike to discuss the wholesale business and other initiatives.

Mike Weil

Thank you, Brian. Turning to our wholesale distribution business, we had a great quarter. Solidifying our market leading position with 2.6 billion in total equity raised this quarter up $1 billion or 63% versus $1.6 billion last quarter. For the six-month period ending June 30, we raised a total of $4.2 billion and with a very strong July or a year-to-date total equity raised through the end of the July was $5.2 billion.

As expected we saw a steady ramp in the equity raised since the beginning of the year given the number of direct investment programs being offered and the various stages of the program lifecycle. And we remain on track for full year 2014 total equity raised of $12 billion excluding Strategic Capital and $14 billion including strategic capital.

As Bill said, we continue to demonstrate our market leading position as the largest wholesaler of non-traded REITs and other direct investment programs. With 46% market share of year-to-date June 2014 non-traded REIT sales according to Robert A. Stanger research.

We continue to believe the overall market for the non listed direct investment products will increase and are positioned to take advantage of those opportunities through our diverse portfolio of offerings. According to our recent Stanger report, approximately $65 billion of non listed direct investment products are currently registered with an additional $12.5 billion of investment in registration. In addition another $40 billion of non listed direct investment products will likely complete liquidity events and recycle capital back into a sponsor program over the next 12 to 18 months.

During the quarter we launched two new direct investment programs including New York City REIT and one oil and natural gas program, American Energy Capital Partners bringing total new program launched in 2014 to three, not including Strategic Capital.

We currently have 31 investment programs in distribution or registration including Strategic Capital and the Hatteras Funds Group offering approximately $40 billion of equity through over 325 broker dealers and registered investment advisors with 1150 selling agreements. Of the 31 programs, 13 are operated by an affiliate of RCAP representing 49% of total registered equity. Eighteen are unaffiliated programs. Moreover, no more than 4.8% of the 2.6 billion in equity raised during the second quarter was concentrated at any one broker dealer on the RCS distribution platform.

Let me take a couple of units to address the pending regulatory change affecting the non-traded program industry, and one, that we receive a lot of questions about doing our investor meeting. Regulatory notice 1406 was recently revised and a new proposal submitted by FINRA to the SEC as they ended increasing transparency within the industry. We were fully supportive of this regulation relating to pricing on customer account statements for non-traded REITs and other direct participation programs. We believe these statement enhancements will provide greater transparency for investors, will add credibility and confidence to the industry, and potentially open new distribution channels.

We commence FINRA as we believe this new regulation which is expected to be implemented in 2016 is very thoughtful workable and will ultimately increase the size of the industry tremendously. We are fully ready for these roles as all of the non-traded investment program is distributed by RCS are prepared to be fully compliant.

Before I turn it over to Brain Jones who will review the financials in addition to covering on investment banking and capital markets business, let me talk about our investment management segment and touch upon our recently announced entry into Crowdfunding, an interesting and promising market where we see long-term growth opportunities. Opportunities we believe are quite complementary to RCAP's platform.

As I mentioned earlier, during the quarter we closed on our acquisition of the Hatteras Funds Group, a leader in the liquid alternative space. This acquisition added approximately $2.8 billion in assets under management and further diversified our revenue sources while also increasing our distribution channels to support continued and future growth.

For those of you unfamiliar with Hatteras, Hatteras provides several liquid alternative investment products including seven open end mutual funds and one closed end fund as of the end of the second quarter. We believe that the growth of liquid alts will continue at a compounded annual growth rate north of 25% providing the opportunity to expand our platform of funds being offered to our retail clients.

Finally, as we announced recently, we were establishing a market leading Crowdfunding investment platform called "We R Crowdfunding," which we expect to fully launch next month. In connection with this initiative we acquired substantially all of the assets of New York based Trupoly Inc, a white-label investor relationship management portal, which will be integrated into RCAP's new Crowdfunding investment platform.

While still in its infancy; Crowdfunding is rapidly becoming an established and growing industry, an industry where we believe we can come to market with a differentiated offering based upon our existing leading financial services platform and capabilities. By ledgering the Trupoly Technology and RCAP's expertise in investment identification, research, due diligence, compliance, structuring and management, we believe Crowdfunding is yet another way to further diversify and enhance our overall revenue streams and help support overall growth.

We are very excited about this opportunity and we look forward to providing additional details as we formally launch the program and go live in September.

With that let me turn it over to Brian Jones.

Brian Jones

Thank you, Mike. Good afternoon, everyone. As you will see in our press release we reported second quarter GAAP results on both an actual and a pro-forms basis. The actual results reflects the impact of acquisitions made during the quarter beginning on the acquisition closing date with the exception of First Allied, which is reported as we've acquired on September 25, 2013 the date upon which that company came under common control with us.

Our pro-forma results reflect the impact of acquisitions as though they were completed as of the beginning of the quarter. this is the same presentation that we used in our form S1 registration statement. We believe pro-forma results are more indicative of our operations for the quarter due to the high volume of acquisitions closed and often used this method for reporting comparative sequential results of operations.

In addition, consistent with industry practice we use several non-GAAP performance measures including EBITDA, adjusted EBITDA and adjusted net income which exclude certain non-cash and non-recurring items. We believe these non-GAAP metrics are useful to users of our financial statements in evaluating the operations and financial condition of the company.

Finally, with the announced acquisitions and related financing completed, you will note some unfamiliar items on our income statement particularly around the accounting for embedded derivatives. For example, we recognized into revenue $58 million of gains from fair market accounting in the second quarter. We also recognized $198 million deemed distribution in connection with our convertible preferred stock. These items have no impact on our operating results or the financial condition of the company. Use of non-GAAP measures allows us to adjust for these items.

Our pro-forma operating results for the second quarter are as follows; pro-forma operating revenue was 825.7 million, an increase of 22% over the first quarter driven by strong performance across all of our businesses. Pro-forma revenue for the first six months was 1.5 billion. Note that these figures exclude the 58 million of derivative fair value accounting gain I mentioned above.

Pro-forma net income was 9.4 million for the quarter or $0.11 per fully diluted share compared to a net loss of 7.4 million or $0.09 per fully diluted share in the first quarter. Pro-forma adjusted net income for the second quarter was 42.6 million, up 12% from Q1 or $0.49 per fully diluted share and 80.6 million or $0.93 per fully diluted share first six months. Adjusted net income added back the after tax effect of non-cash and non-recurring items.

Pro-forma adjusted EBITDA through t second quarter was 71.8 million, up 12% from the first quarter, and 136 million for the sox months period. Consolidated Q2 adjusted EBITDA margins were 8.7%, up compared 7.8% for the full year 2013.

Shares outstanding at the end of the quarter were 65.7 million on a basic basis and 87.1 million on a fully diluted basis which assumes the conversion of our outstanding convertible notes and convertible preferred stock. We use these share counts for calculating the pro-forma per share amount cited above.

Looking at pro-forma results by segments, retail advice revenue for the second quarter was 494.5 million on a pro-forma basis, up 7% compared to the prior quarter. Pro-forma retail advice adjusted EBITDA was 32.2 million for the quarter, an increase of 35% over the first quarter and 56 million for the first six months. Retail advice adjusted EBITDA margin increased 140 basis points to 6.55 from 5.1% in the first quarter. Full year 2013 retail advice segment adjusted EBITDA margin was 5.4%.

Wholesale broker dealer revenue for the second quarter was 325 million, up 83% from 177.9 million in first quarter. The sequential increase which includes Strategic Capital revenue in both periods was driven by increased equity sales. Wholesale pro-forma adjusted EBITDA was 13.5 million for the second quarter and 13.7 million for the first six months. Second quarter wholesale EBITDA margin, which includes the impact from the Strategic Capital standalone operations were approximately 4.2% compared to 6.2% for the fuller 2013. The first quarter wholesale adjusted EBITDA margin was not meaningful.

Capital markets revenue which includes investment banking, capital markets and transaction management was up 320% on a year-over-year basis to 39.1 million for the second quarter and 87.6 million for the first six months exceeding total revenues for all of last year. Capital markets revenue was down sequentially due mainly to higher first quarter M&A revenue.

A few additional details regarding our second quarter capital markets operations. Investment banking revenues totaled 21.5 million for the second quarter driven by increased direct investment product liquidity event activity. Year-to-date investment banking revenues totaled 53.5 million. Transaction management revenue for the second quarter totaled 10.7 million due to an increase in liquidity events and new funds launched during the quarter.

Year-to-date transaction management revenues totaled 23.1 million. Transfer agent revenue increased to 6.9 million for the quarter driven by liquidity events, seasonal proxy solicitations and increased direct investment sales. Transfer agent revenues were 11 million for the first six months. Capital markets pro-forma adjusted EBITDA was 25.3 million for the second quarter and 63.3 million for the first six months. Capital market EBITDA margin declined slightly to 65% for the second quarter compared to 78% in the first quarter and in line with the 2013 margin of 56%.

We continue to maintain strong real estate investment banking market share reflected in our number one 2014 year-to-date lead table position based on announced and closed transactions. Our unique expertise in the direct investment industry coupled with increasing direct investment product liquidity events activity provides good visibility over the next 12 to 18 months for incremental growth in what is historically a high margin business.

Turning to our investment management segment pro-forma revenue for the second quarter was 15.7 million versus 14 million for the first quarter, an increase of 12% reflecting the increase in AUM from 2.7 billion to 2.8 billion as well as relative growth of higher fee mutual funds compared to closed end funds.

Year-to-date pro-forma investment management revenues were 29.7 million. Pro-forma adjusted EBITDA was 3 million for the second quarter and 5.6 million for the first six months. Investment management adjusted EBITDA margin for the second quarter was 19.1%, up from the first quarter and full year 2013 of 18.6% and 16.7% respectively.

Financial results for our fifth business segment SK Research, which began operations during the quarter are not meaningful. We will begin to report segment results for SK Research with the third quarter results.

As of June 30, 2014 cash and cash equivalents totaled 469 million excluding regulatory cash held at our various broker-dealer subsidiaries. After adjusting for net cash uses including 8.7 million to close the ICH acquisition in July and 60 million expected to be used to close the Strategic Capital acquisition later this month, as well as the $25 million available on our revolving credit facility.

Total company liquidity as of June 30 is approximately $436 million. As of the end of the quarter we had outstanding debt including our convertible notes of 820 million. Debt to second quarter annualized pro-forma adjusted EBITDA was approximately 2.8 times or less than 1.5 times on a net debt basis. We are very comfortable with this leverage level long-term. I'd expect to see absolute debt as well as debt to EBITDA ratio decrease over the near term as we reduce debt to amortization and EBITDA continues to grow.

Not only is our balance sheet strong, we also have minimal balance sheet risk as we do not engage in proprietary trading or other risk activities.

Finally, since this is the first quarter we are reporting many of the GAAP to GAAP adjustments related to our retail advice acquisitions, let me take a moment to walk through these reconciliation computations which are shown on page 13 of our earnings release.

In computing EBITDA we add back to GAAP net income, interest expense, tax expense, and depreciation and amortization expense. We compute adjusted EBITDA by adding back to EBITDA non-cash compensation expense, acquisition and merger related cost, capitalized advisor compensation and amortization and other expenses which consist primarily of charges and/or gains from embedded derivative fair value accounting. To compute the adjusted net income we start with GAAP net income and add back on an after tax basis, non-cash stock compensation expense, acquisition and merger related cost and the fair value of accounting items I mentioned previously, as well as acquired intangible amortization expense on a pre-tax basis.

With that, let me turn it back to Mike.

Mike Weil

Thank you, Brian. As we've said, we are extremely pleased with the results we announce today. We are confident that we have the right plan and the right team in place to drive continued growth as we capitalize on key trends in the industry. It's clear there are very attractive market fundamentals in the wealth management and financial services industries that we will continue to be positive drivers for our business.

We are excited about both our near and long-term prospects with our integrations proceeding ahead of plan and our industry-leading programs well established. We are extremely optimistic about the future.

Operator, let's open up to Q&A, please.

Question-and-Answer Session


(Operator Instructions) The first question comes from Devin Ryan of JMP Securities. Please go ahead.

Devin Ryan - JMP Securities

Hey, good afternoon gentlemen.

Mike Weil

Hi, Devin.

Devin Ryan - JMP Securities

So, maybe starting on the wholesale business, a couple-part question, but just first the equity raised, so it sounds like you guys have raised about $1 billion thus far in July. So can you give a little color around that? How much of that was driven by liquidity events that's the catalyst for people to put money back into second generation product or whatever it may be versus how much was selling into some of your newer products?

Mike Weil

Devin, it's Mike. We currently work with 17,000 producing advisors across the country. Not a lot of the $1 billion raised in July came directly from the recycling. This was new monies being invested into the direct investment space. In April, as you know, two of our programs went from a non listed vehicle to a listed vehicle. We did recapture some of that money, but it is an ongoing process. What we are hearing and seeing in the market based on activity on the wholesale side of the business is financial advisors more than ever are looking to direct investments as a way to offer their clients the vehicle with capital preservation and current income at a point in the economy where we are in a unusually low interest rate environment.

So we still see great upside for the second half of the year coming from the capture of those liquidity events while we still look to bill the business on new producers.

Devin Ryan - JMP Securities

All, right, got it. I guess and maybe you just alluded to it, I mean there has been some recent press articles around just non-traded REIT and duration risk there. So with respect to what you guys have maybe sold in the past, how do you guys view that duration risk in the assets and within maybe somewhat triple-net lease, how much are rent escalators in the actual assets?

And then more broadly, the products that you guys are adding on to the platform, if you build out the platform, how do you feel like your position for rising rates and how many products are you going to have that are actually going to benefit when rates move higher. It's kind of a broad question, but all tied into an interest rate environment and where it can go?

Mike Weil

Thanks, Devin. I'll pick that one as well. As you know, we have a long history with triple-net real estate and it's an asset class that we feel is very reliable and a nice allocation. But as you know RCS Capital is no longer involved in the distribution of triple-net real estate. We have moved into other opportunities and it was one of the underlying premises as we developed the wholesale platform. We wanted to be able to offer both affiliated and non-affiliated programs. We wanted to be able to move in and out of asset classes. We expected and h developed much more than a real estate only focus. And I think your question hits on a very relevant point, as the economy continues to improve, whether that's in two years, three years or we just don't know, we do believe that we will see some interest rate growth in the industry and we started to move into asset classes that will benefit from interest rate growth, typically because we going a belief, interest rate growth will follow improvement in the economy, a sustainable healthy economy.

We have lending programs that are variable rate, we have hospitality programs which will focus and capture the upside of increased business travel, and most importantly why we moved so quickly with Hatteras Funds Group was to help develop the liquid alternative side of this business with both open end and closed end mutual funds. So our strategies will continue to develop. We believe that we are going to continue to have relevant offerings. And we also have a very strong belief that financial advisors across the country look to alternatives both liquid and illiquid alternatives as an allocation in their overall strategy to create returns that are not correlated to traded indexes. So we are very bullish on the opportunity both through the end of this year and into the future.

Devin Ryan - JMP Securities

Okay. I appreciate that. And then just with respect to Rule 14 SX, thanks for the update. I know that there really isn't too much mirror view in terms of kind of the way things are progressing. We've been looking at this for quite some time. With respect to -- implementation are still, I believe 18 months before we actually started to move forward on the implementation, but what else -- I know that you're staying with the funds in the way that the funds are structured, they are already setup to be able to comply with that. So, is there anything else that needs to be done to be ready for changes with 14 SX?

And then also tied into that, where do you see potentially commission structures going with the product, and how does that play out? Does that play out over (indiscernible) as we lead into implementation, is it afterwards? I'm just curious, and how does that actually takes shape on the commission side?

Mike Weil

Well, I think the first part of your question, the fact that we have an adoption period, where FINRA and the SEC have made it known that this is the direction that we'll be going, gives us plenty of time from a training and education, and frankly a socialization standpoint to help the financial advisors prepare both themselves and their clients for the change.

We've seen changes like this in other what have now become very large asset classes, specifically mutual funds in the 1980s and insurance products through the 1990s and early 2000. When we have regulatory changes like this that improve transparency, what we've found is that the industries tend to grow significantly based on improvements to the investor. There could be a short downturn as advisors are talking to their clients, but on the other hand with 18 months to prepare we think that can happen simultaneously. And we think that this is one of the driving factors that's going to help this industry grow. There are estimates out there; Robert A. Stanger & Associates has indicated that they think in the next three years this could be a $70 million to $100 million equity business on the direct investment side. And we plan on being a big part of that, and we're happy to put our time in -- again on training and education to help the advisors prepare for this.

Devin Ryan - JMP Securities

Okay, I appreciate that. Maybe asking a little bit differently; in the scenario, let's say, equity rates stays exactly flat from where it is today, how do you think the economics change to RCAP, the company. I mean do you think that your firm actually has a big impact to say that we're selling the exact amount moving as we're selling today based on where commission revolving or how the economics move? Did that change? Your view of what RCAP will make or do you just think that is more changing the actual composition of the economics, but ultimately the end result is just the same?

Mike Weil

I think on the margin side of RCAP's business, it has very little impact. What I do expect is that as you see the industry growing, more advisors will be participating; the industry will become more sophisticated. We've seen things like this. Again I'll reference the mutual fund industry, which many people forget, used to be a relatively high commission product and as it became a mainstream investment vehicle for advisors, the overall load in that product came down. And over the next few years, I wouldn't be surprised if we see that happen here, but I think again you'll make it up on the margin side through volume.

Devin Ryan - JMP Securities

Got it, okay. And then just with respect to on the retail side, so the new -- I believe you have a new arrangement in place primarily with the Pershing. Can you speak to how that differentiates or maybe what is changed around that maybe gives benefits if there are any, whether it would be financial or otherwise, just some more color around what that actually means and how we should think about it from the outside in terms of the impact on RCAP?

Brian Nygaard

Sure, Devin. This is Brian Nygaard. We've had as a group of collection of companies and as a management team literally decades of experience with Pershing. We've been engaged for the last couple of months with very constructive conversations essentially with the common theme. And that common theme is really how can we essentially take what is the traditional pricing scheme of Pershing and we can figure it in a way that provides us both near-term benefits in terms of EBITDA gains and in terms of leverage going forward.

We're now getting close to being to an agreement with that, and in the next quarterly call we'll have more details as to how that plays out, but we'll say at this point that we're looking at synergy saves that are at last at the anticipated numbers or maybe higher.

Devin Ryan - JMP Securities

Okay, fantastic. And then, just last one and then I'll hop back in the queue. So, with respect to the VSR transaction announced last [evening] (ph) it seems to take kind of makes sense with the other deals that you've done on the retail side, kind of tuck-in as you mentioned. When we look at your doing deals, I know there is no terms disclosed here, but how do you guys think about what makes a deal financially appealing. Is it the accretion number? Is it the -- you have to make assumptions on what the synergies that are going to come out? How should we think about what is an attractive financial vehicle on top of a cultural deal or strategic deal for you?

Larry Roth

This is Larry. I'd like to address that. Let me address in two ways; one is I wanted to just share with everyone on the phone a little bit about some of the leadership team that we put in place, because it speaks directly to our acquisition and tuck-in strategy. So I mentioned to Adam, a little earlier the President of Cetera Financial Group, Adam is an industry veteran, and by the way (indiscernible) our management team collectively have acquired and run, and in most cases folded in over 30 IBDs in their careers.

Adam has done probably eight or nine himself with this team. So Adam is focused as I mentioned earlier on supporting the CEOs of the various firms and helping them and their advisors take full advantage of RCAP platform, which we're developing in order to give Adam the time he needed to work with Brian and I and Mike and rest of us, we hired another industry executive, Kevin Keefe, who is President of First Allied, that was an add we haven't talked about before.

We also -- Sheila Woelfel, for the role that Sheila has after 15 years at LPL and five years at AIG Advisor Group is to help us build a strategic partner program, which like the Pershing discussion you just had with Brian will be leveraged against all of these holding acquisitions and other freestanding acquisitions, if we were to happen to make any. She is a full-time executive with the team and is executing, and we can get into those details later on in the call if people want to hear about them.

We also brought in a gentleman by the name of Joe Neary as our Chief Risk Officer. He was just announced recently. And he is not only a lawyer, but also product and wholesale/retail, a significant amount of retail distribution experience. So Joe, is as the new firms are acquired looking at them from a risk profile standpoint and finding the best way to integrate and support those firms without compromising our commitment to quality, compliance, supervision, etcetera. There are several other examples I can share with you, but I'll just give you one more for now, and then I'll go specifically to your question.

Brett Harrison, who some of you may know, is the CEO of Cetera Advisors joined us of course with the Cetera acquisition. In order to give Brett the opportunity to work with us, Brian and I and others on platform design and implementation across all the firms including the new tuck-ins, we promoted Aaron Ford, Aaron joined us when her firm was acquired about a year or year and a half ago with Cetera. So we've added five or six, in most cases 20 plus year experienced veterans in addition to our management team and we've configured the firm in a way that's designed to capture the synergies and build a leverageable platform so that when we do these fold-ins, they're able to take full advantage of what we built, and we're able to capture the EBITDA that we're looking for with the transaction.

So to answer your question, I'll use VSR as an example, because it's an excellent example. And this is by the way for those of us who have visited you directly in your offices you've heard us on road shows is a perfect example of what we were talking about. We're finding that the acquisitions of incremental firms will be at cost that are less than we've experienced with large transactions that you'd expect like a Cetera for a First Allied, we're finding that the incremental EBITDA or I'll call it marginal EBITDA will be at or above the ranges that we've discussed, because we were building the platform in a way that it's the advisors and their assets migrate into our world, which we think they're going to love in terms of helping advisors grow their businesses and better serve their clients are going to be seamless.

So the net is the acquisition prices relative to the deals that you're familiar with are coming down to a more industry number I guess you could say, and the marginal EBITDA is at or above the levels we've been discussing as we've been traveling.

Devin Ryan - JMP Securities

Got it. And in terms of thinking about paying for the deals, is it the preference to use cash flow from operations as it builds or to have some equity component to incentivize folks that are coming on board? How do you think about in terms of structuring the right package so that everybody is walking in the same direction, but you get the most amount of accretion out of it without, say, diluting your existing shareholders?

Mike Weil

Devin, it's a great question and it's where the conversation of art and science come together. As you know, we have cash on the balance sheet that we have told the market is available for these type of accretive acquisitions. We do think that are some benefit to having an equity or stock component to the acquisition. It's a wonderful retention tool for the management of the company that's being acquired.

So every deal will be structured a little bit differently. We certainly do take into account and give a lot of thought to the potential dilution factor. I think on the small fold-in/tuck-in type acquisitions, consideration component being in stock is very useful, and we'll continue to evaluate each opportunity independently.

Devin Ryan - JMP Securities

Okay, thanks for taking all my questions. I appreciate it.

Andy Backman

Thanks, Devin. Next question, please, Andrew?


The next question comes from Kenneth Hill of Barclays. Please go ahead.

Kenneth Hill - Barclays

Hi, good afternoon guys.

Mike Weil

Hi, Ken.

Larry Roth

Hi, Ken.

Kenneth Hill - Barclays

I wanted to touch a little bit on the synergies, I know you guys talked about you're in a good place with the 57 to 65, you've outlined already, and I wanted to dig in a little bit more on the incremental upside here on 2015. I think that refers to some of your strategic partner revenue. I know you've categorized that a 27 to 30 here and you mentioned you want to have that in the run rate by the end of the year. Can you speak to what could potentially drive that higher over the course of 2015, maybe one of the first passes kind of getting you on par with where Cetera was, maybe where Cetera is versus the industry and how you guys can kind of get to that level over time?

Brian Nygaard

Yes, that's great. Again, this is Brian Nygaard. I think maybe the best way to address that question is as we've said we'll be issuing guidance in the third quarter for 2105. Over the next few months, we'll be very careful in looking at those incremental opportunities. And we'll then essentially be baking those into our 2015 guidance numbers.

Kenneth Hill - Barclays

Okay, fair enough.

Kenneth Hill - Barclays

Larry, you might want to add up comments there.

Larry Roth

Hi. It's Larry. I'd just add as I referenced in my remarks, we -- the 57 million to 65 million that you see on page 11 of the presentation are the synergies that we're confident that we'll achieve by the end of the year on a run rate basis. You'll see some of that, I believe in Q4, some of it possibly even in Q3. There is additional upside. Some of the upside will come -- was already discussed by Brian will be built into the way the clearing arrangement works. There will also be additional upside in our other arrangements with third-party vendors. It could be technology vendors, but also strategic partner vendors. It's difficult to quantify right now, but I'll tell there is additional lift that we'll see in '15 and beyond.

Kenneth Hill - Barclays

Okay. I wanted to jump over to investment banking here little quick; I think it was earlier this quarter you guys had the mutual termination with your investment banking relationship with ARCP, given they weren't going to be doing any merger activity or equity raises in 2014, I'm wondering if that's opened up any opportunities for you guys since then, and how that's impacting your outlook going forward?

Brian Jones

Ken, its Brian Jones; and it most definitely did. That was our primary consideration in doing so. We had by way of background a tail arrangement in connection with the investment banking work that we did for the co-op merger. Typical investment banking tail arrangement that I'm sure many of you've seen in the past. We found that we were often given the relatively finite nature of the industry. We were often conflicted in situations where we had a right to represent America Realty Capital Properties, and their focus turned inward. It made sense to agree to terminate that arrangement, and to do so in a more public way. And it definitely has allowed us for the opportunity to pursue engagements with -- in situations that might have otherwise involved ARCP, but it freed us up to just to be talking to other parties.

So it definitely were the benefit to us to do so, and again, the expectation -- we continue of course to be very close with that management team as well as the Board of Directors given the role that we played in growth of that company over the past several years. So, to the extent that there were something there, it doesn't prohibit us from working with the company, but it's definitely freed us up to spend more time with some other opportunities.

Kenneth Hill - Barclays

Okay. And last one from me is just on kind of on the client side, I was wondering if you guys have any share of wallets for some of your clients and how they can think about potentially increasing that wallet size for your clients versus some of the more recent acquisitions you've done where you invited advisors to the platform?

Mike Weil

Ken, was the question share of wallets?

Kenneth Hill - Barclays

Just client wallet -- they felt how clients are invested, where you're thinking about additional opportunities for investment over time with those clients and the growth trajectory there versus maybe adding advices with additional client assets?

Larry Roth

It's Larry; I'd be glad to answer the question. You're actually hitting on one of our key initiatives. We've -- as you'd expect we have a data warehouse built that handles a lot of client data, including their personal preferences and risk tolerance, etcetera. We're just engaged to further develop that data warehouse, so that we can capture not only the assets that the clients have with us, which of course we know well today, but also the client assets that reside elsewhere. Of course some of that or most of that needs to be done on a volunteer basis, but the technology available today allows us to capture that during the client interview process and feed it into our system. So we'll better understand share of wallet as you're describing it.

And that also as we're chatting about it is something that our strategic partners are keenly aware of and excited about, because we want to make sure that our clients are being well served, and that we have the ability to serve the largest portion of their portfolio possible, so some of that's being done today. More of it will be done over time. And we think we're going to be ahead of certainly any other IBDs in that regard some time during '15.

Kenneth Hill - Barclays

Okay. I appreciate you guys taking my questions, thanks.

Larry Roth

Thanks, Ken.

Andy Backman

Andrew, next question please.


The next question comes from Michael Carrier of Bank of America Merrill Lynch. Please go ahead.

Michael Carrier - Bank of America Merrill Lynch

Thanks, guys. First question; just on the wholesale business, yes, I think I understand in this quarter on the pro formas you're including Strat Cap, but when I look at it, when you look at the equity capital raised, it's the 2.6, and obviously if I look at the revenues into the segment, whether it's a commission rate, the manager dealer rate, everything seems elevated. So I just want to make sure if we are thinking about the revenue environment in wholesale this quarter, it's not on a 2.6, it would be on like a 4.6 number with Strat Cap, I just want to make sure we're looking at the ratios correctly.

Brian Jones

It's Brian Jones. Just to be perfectly clear, I think the ratios you have are a little bit off, but you're absolutely correct that our revenue numbers are combined -- I'm sorry, yes, the revenue numbers are combined revenues for Strat Cap and RCS. The sales numbers aren't RCS only. So that's why you're seeing increased -- what looks like increased percentage of revenues as compared to sales, because the sales numbers do not include quarterly sales by Strat Cap.

Michael Carrier - Bank of America Merrill Lynch

Okay, that makes sense. And then, just in terms of the outlook, I guess on the wholesale side, if we think about that $12 billion target, and you're little over five, I guess in terms of you have five more months for the year and then going into '15, when we think about the capital markets and the environment, more volatility in the markets versus what you mention in terms of demand by the advisors and clients for these products. And then any seasonality, I guess August generally slow, December, the holidays, slower, is there a year end push? I just wanted to get some sense of what we should expect as we go through the rest of this year.

And then on the investment banking side, sort of the same thing, I think you mentioned a pretty big pipeline for liquidity events. So, just some sense of how we should try to look at that over the next 12 to 18 months?

Mike Weil

Yes, it's Mike. I'll start on the first part of your question. We expect the remaining part of this year to be our greatest opportunity, both from a seasonality aspect, but also from a lifecycle of offerings combined with the return of capital generated through liquidity events.

So, we at RCS Capital through the years have taken the summer months as an opportunity to increase our market share and grow the business. We work, and have wholesalers that work just as hard in the middle of summer as they do in every other month of the year. And that's shown by the results in July where we had one of our best months year-to-date at $1 billion raised.

As we've also talked, these programs have a lifecycle. The beginning of the program is a little bit of a slower ramp up, the midpoint of the offering we see ramp up. When we're somewhere in the neighborhood of two thirds complete in the equity raised we go into, frankly a work speed and we raise between $250 million and $500 million in about a two-month period per product.

We've experienced some of that. We have more ahead through the second half of the year, and then combine that with anticipated or potential liquidity, we'll continue to work through and in our belief meet our $12 billion target that we put into the market.

Michael Carrier - Bank of America Merrill Lynch

Okay. Thanks a lot.

Bill Kahane

And then, Mike with respect to investment banking. As we note in the press release, we've been engaged publicly by managements of two non-traded REITs with respect to evaluation of strategic alternatives, i.e. liquidity events. The timing of those activities isn't something that I can really discuss, but it does give us good visibility on our revenue pipeline looking out for the next six to 12 months.

In addition, following the listing of three different companies in the second quarter, we were engaged by our healthcare trust, American Realty Capital Healthcare Trust in connection with an offer it received and accepted to be acquired by Venta. So, we have good visibility based on some deals that we're working on presently that have been publicly announced, and of course we're always working as all investment bankers do, on additional transactions that we can't speak to publicly.

Michael Carrier - Bank of America Merrill Lynch

Okay, thanks.

Bill Kahane

Okay. Thanks, Mike. Andrew, next question please.


Yes. Our last question comes from Michael Finkelberg of Luxor. Please go ahead.

Michael Finkelberg - Luxor

Hi, thanks for taking my question. Just two things I think right now; the retail segments Q2 adjusted EBITDA margins were 6.5%, and were the synergies providing incremental improvement from there. LPL margins are closer to 12% though. Can you help us bridge the difference?

And then, longer-term, is 12% a reasonable target for RCS or is there some structural reasons why we should expect the retail margins to be lower?

Larry Roth

This is Larry. There are few major components here. You're familiar with the model of course, Michael, the margin, there are going to be a significant amount of margin improvement this year, and let's just say 1/1/15 on a run rate basis, that you are familiar with. And there will be incremental as we've been discussing. I personally believe that we can make up as the business is currently configured over time about 300 to 400 basis points in addition to those that have already been identified in the deck you're looking at today.

Beyond that, there is -- once we have our contract completed with our clearing fronts there will be margin on top of that. I personally don't have -- I have a clear line of sight to somewhere between 10% and 11%. I don't have a clear line of sight from that 11 to 12 that you're referencing. But over time, as we grow our business I think it's entirely possible that we can get there. And some of that will have to do with the way that we're structuring the business to our marginal EBITDA -- adjusted EBITDA growth I think is going to be significantly above that 12% bogie that we're talking about. And so, some of this will have to do with how large we'll grow the firm, but to answer your question as simply as I can, I have a clear line of sight to call it 10.5%. And Nygaard is going to have to deliver the other 150 basis points.

Brian Nygaard

So, I mean …

Michael Finkelberg - Luxor

Okay, got it. And then, how do you think about clearing for the retail business going forward? Did you think you can get some other economics if you stay with Pershing clearing?

Brian Nygaard

Part of our ongoing discussion is essentially to create an environment, where we all the advantages of self-clearing from an economic standpoint and can lever the capital that we don't have to invest in that towards value-added processes, products, systems that will help our advisors build productivity serve their clients better and essentially build scale. So we think we've got a pretty good line on that.

Michael Finkelberg - Luxor

Okay, thanks.

Andy Backman

Okay, thanks, Mike.


Please go ahead Mr. Weil with any closing statements.

Mike Weil

Thank you. Well, thanks everybody. It's a long call. We realize that there is a lot of detailed information that we think is very helpful to spend the time and go over with you. During the second quarter, we continue the momentum from the first quarter. We look forward to reporting additional good news and progress throughout the year. We believe there is tremendous value in the company. We look forward to unlocking that value as we continue to execute on our business plan. Andy?

Andy Backman

Great. Thanks, Mike. And thank you everyone for joining us this afternoon. As always, our management team is available to speak with you. Should you have any follow-up questions, if so, please do not hesitate to call me directly at 917-475-2135. Andrew, would you please go ahead and give the conference call replay instructions one more time. Have a great day.


Thank you, Mr. Backman. As a remainder, this conference call will be available for replay beginning at 3:30 p.m. Eastern Time today. The dial in for the reply is 1877-344-7529, with the confirmation code of 10048924. Again, the dial in number for reply is 1877-344-7529, with the confirmation code of 10048924.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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