RF Capital Group Inc.
Report to Shareholders
Fourth Quarter and 2023
A Message from our President & CEO
2023 marked the completion of our three-year journey to transform our business and position ourselves to seize the opportunity in front of us as our industry rapidly expands - a transformation that included many milestones.
One of the biggest was the transition of our back office to Fidelity. While it was unquestionably challenging, I am proud of how our advisor teams and all those who support them worked hard to adapt to change and helped to build a highly scalable platform for the future. Their commitment, engagement and feedback helped us implement strategies to address gaps, enhance the overall experience, and enable long-term growth in all areas of our business. We are seeing the benefits of these initiatives, including in the quality of people we are attracting.
Natalie Bisset and her corporate development team have built a robust pipeline of high-quality prospects and in 2023 they inspired advisor teams managing $1.7 billion of AUA to join us. In Victoria, B.C., Natalie's team helped open a new office and onboard three advisor teams who collectively manage $800 million in AUA. These teams cite our enhanced platform and our strong advisor-centric culture as key reasons for choosing our brand.
Dave Kelly
Chief Operating Officer
After a search in 2023 for the right person to enhance the overall
experience for advisors and drive profitable organic growth, Dave | Natalie Bisset |
SVP, Head of | |
Kelly joined us as Chief Operating Officer of Richardson Wealth on | |
January 15, 2024. Dave's career spans more than 25 years of | Corporate Development |
progressively senior roles in financial services. Most recently, he | |
was Head of Gluskin Sheff & Associates, a prominent independent Canadian advisory firm. Prior to that, Dave spent 14 years in wealth management at Toronto-Dominion Bank, culminating in the role of SVP & Head, Private Wealth Management & Financial Planning. In choosing us after interviewing 50 industry professionals, he said "with the significant investments Richardson Wealth made to dramatically scale the business now in place, I am drawn to the firm's advisor- centric culture, the rich history of the name on the door, and the vision to become the brand of
choice for Canada's top advisors and their clients."
Financially, we finished the year with AUA up $288 million, $35 million of cash flow available for growth, and overall results in line with 2022. For a full analysis of our fourth-quarter and year-end results, please see the accompanying Management Discussion & Analysis. Included is a section entitled 2026 Recognition Payments which details a commitment made in 2020 to reward advisors who remain with the company in November 2026.
As we conclude three years of fundamental transformation and embark upon a journey focused squarely on our three-pillar growth strategy ‒ driving organic, recruiting, and inorganic growth ‒ I am confident that we can begin to unlock the long-term value of the investments we have made to pursue opportunities in our industry, which is expected to double in size in the next decade.
I look forward to updating you on our progress over the coming year.
Kish
Contents | |
44 | |
3
Management's Discussion & Analysis - 2023
About this Management's Discussion and Analysis
The purpose of this management's discussion and analysis (MD&A) is to help readers understand the consolidated financial condition and results of the consolidated operations of RF Capital Group Inc. (the Company) as at and for the year ended December 31, 2023.
This MD&A, dated February 29, 2024, should be read in conjunction with the audited consolidated financial statements and related notes as at and for the year ended December 31, 2023 (2023 Annual Financial Statements). This document as well as additional information relating to the Company, including our 2023 Annual Financial Statements, and our latest annual information form (AIF), can be accessed at www.rfcapgroup.com and under our profile at www.sedarplus.com, and are incorporated by reference herein.
This MD&A refers to certain non-Generally Accepted Accounting Principles (GAAP) and supplementary financial measures (SFMs), including non-GAAP ratios, which we believe are useful in assessing our financial performance. Readers are cautioned that these measures do not have any standard meaning prescribed by GAAP under IFRS Accounting Standards (IFRS) and are therefore unlikely to be comparable to similar measures presented by other issuers. For further information related to adjusted results and a reconciliation to their nearest IFRS measures, please read the "Non-GAAP and Supplementary Financial Measures" section at the end of this MD&A.
Unless otherwise specified herein, financial results contained in this MD&A, including related historical comparatives, are based on our 2023 Annual Financial Statements, which we have prepared in accordance with IFRS.
Certain prior period amounts have been reclassified to correspond to the current period presentation. All numbers and discussion in this MD&A relate to continuing operations unless otherwise specified.
Our Board of Directors (Board) has approved this document.
Forward-Looking Information
This MD&A contains forward-looking information as defined under applicable Canadian securities laws. This information includes, but is not limited to, statements concerning objectives and strategies to achieve those objectives, as well as statements made with respect to management's beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts. Forward-looking information generally can be identified by the use of forward-looking terminology such as "outlook", "objective", "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "should", "plans" or "continue", or similar expressions suggesting future outcomes or events. Such forward-looking information reflects management's current beliefs and is based on information currently available to management. The forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement.
The forward-looking statements included in this MD&A, including statements regarding our recruiting pipeline, the nature of our growth strategy and execution of any of our potential plans, are not guarantees of future results and involve numerous risks and uncertainties that may cause actual results to differ materially from the potential results discussed or anticipated in the forward- looking statements, including those described in this MD&A and our AIF. Such risks and uncertainties include, but are not limited to, strategic (including advisor retention and acquisitions), market, credit, liquidity, operational and legal and regulatory
4
Management's Discussion & Analysis - 2023
risks, and other risk factors, including variations in the market value of securities, dependence on key personnel and sustainability of fees.
Our results can also be influenced by other factors, such as general economic conditions, including interest rate and exchange rate fluctuations, and natural disasters, or other unanticipated events (including the novel coronavirus and variants thereof (COVID-19 pandemic)). For a description of additional risks that could cause actual results to differ materially from current expectations, see the "Risk Management" section of this MD&A.
Although we attempted to identify important risk factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other risk factors not presently known to us or that we presently believe are not material that could also cause actual results or future events to differ materially from those expressed in such forward-looking information.
Certain statements included in this MD&A may be considered a "financial outlook" for purposes of applicable Canadian securities laws. The financial outlook may not be appropriate for purposes other than this MD&A.
Forward-looking information contained in this MD&A is:
- based on assumptions we consider reasonable; however, there can be no assurance that such expectations will prove correct. As such, readers should not place undue reliance on the forward-looking statements and information contained in this MD&A. When relying on forward-looking statements to make decisions, readers should carefully consider the foregoing factors, the list of which is not exhaustive;
- made as of the date of this MD&A and should not be relied upon as representing our view as of any date subsequent to the date of this MD&A. Except as required by applicable law, our management and Board undertake no obligation to update or revise any forward-looking information publicly, whether as a result of new information, future events or otherwise; and
- expressly qualified in its entirety by the foregoing cautionary statements.
5
Management's Discussion & Analysis - 2023
Select Annual Financial Information
2023 vs 2022 | 2022 vs 2021 | ||||
($000s, except as otherwise indicated) | 2023 | 2022 | 2021 | Increase/(decrease) | |
Key performance drivers 1: | |||||
AUA - ending2 ($ millions) | 35,236 | 34,948 | 36,847 | 1% | (5%) |
AUA - average2 ($ millions) | 35,574 | 35,419 | 33,925 | 0% | 4% |
Fee revenue | 255,707 | 254,802 | 242,916 | 0% | 5% |
Fee revenue3 (%) | 89 | 88 | 86 | +177 bps | +178 bps |
Adjusted operating expense ratio4 (%) | 71. 1 | 69.8 | 72.7 | +128 bps | (289) bps |
Adjusted EBITDA margin5 (%) | 16. 9 | 17.4 | 15.4 | (47) bps | +197 bps |
Asset yield6 (%) | 0. 86 | 0.85 | 0.82 | +1 bps | +3 bps |
Advisory teams7 (#) | 157 | 162 | 162 | (3%) | - |
Operating Performance | |||||
Reported results: | |||||
Revenue | 351,119 | 353,972 | 328,519 | (1%) | 8% |
Operating expenses1,8 | 150,854 | 151,207 | 156,543 | (0%) | (3%) |
EBITDA1 | 54,988 | 53,017 | 29,365 | 4% | 81% |
Income (loss) before income taxes | (5,509) | (3,111) | (19,805) | 77% | (84%) |
Net income (loss) from continuing operations | (9,828) | (4,803) | (20,152) | 105% | (76%) |
Net income (loss) from discontinued operations9 | (2,064) | - | - | n/a | n/a |
Net loss per common share from continuing operations - diluted10 | (0. 93) | (0.95) | (3.33) | (2%) | (72%) |
Adjusted results 1: | |||||
Operating expenses8 | 146,340 | 142,573 | 135,153 | 3% | 5% |
EBITDA | 59,502 | 61,651 | 50,755 | (3%) | 21% |
Income (loss) before income taxes | 12,055 | 18,575 | 14,637 | (35%) | 27% |
Net income (loss) | 3,108 | 11,100 | 7,356 | (72%) | 51% |
Adjusted earnings (loss) per common share - diluted10 | (0. 08) | 0.43 | 0.20 | (118%) | 112% |
Select balance sheet information: | |||||
Total assets | 1,379,983 | 1,699,654 | 2,216,015 | (19%) | (23%) |
Debt | 110,922 | 110,922 | 110,922 | - | - |
Shareholders' equity | 330,539 | 346,921 | 354,890 | (5%) | (2%) |
Net working capital1,11 | 81,208 | 95,224 | 105,991 | (15%) | (10%) |
Common share information: | |||||
Book value per common share ($) | 14. 02 | 14.80 | 15.25 | (5%) | (3%) |
Closing share price ($) | 7. 52 | 11.50 | 19.00 | (35%) | (39%) |
Common shares outstanding (millions) | 15. 6 | 15.9 | 15.9 | (2%) | (0%) |
Common share market capitalization ($ millions) | 117 | 182 | 302 | (36%) | (40%) |
Cash flow: | |||||
Cash provided by (used in) operating activities | (268,497) | (107,402) | (18,811) | 150% | 471% |
Free cash flow available for growth1 | 35,400 | 40,199 | 27,421 | (12%) | 47% |
Free cash flow1 | (2,564) | (9,896) | 4,555 | (74%) | (317%) |
- Considered to be non-GAAP or supplementary financial measures, which do not have any standardized meaning prescribed by GAAP under IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. For further information, please see the "Non-GAAP and Supplementary Financial Measures" section of this MD&A.
- AUA is a measure of client assets and is common in the wealth management business. It represents the market value of client assets managed and administered by us.
- Calculated as fee revenue divided by commissionable revenue. Commissionable revenue includes wealth management revenue and commissions earned in connection with the placement of new issues and the sale of insurance products.
- Calculated as adjusted operating expenses divided by gross margin
- Calculated as Adjusted EBITDA divided by revenue
- Calculated as wealth management revenue plus interest on cash divided by average AUA
- Prior year has been revised to reflect the internal consolidation of certain teams
- Operating expenses include employee compensation and benefits, selling, general, and administrative expenses, and transformation costs and other provisions. Adjusted operating expenses are calculated as operating expenses less transformation costs and other provisions.
- In Q2 2023, we recorded a provision for a legacy employment litigation matter related to the 2019 sale of our capital markets business to Stifel Nicolaus Canada Inc. See Note 25 to the 2023 Annual Financial Statements.
- In 2022, we consolidated our common shares at a 10:1 ratio. Prior period common share information has been adjusted to reflect this consolidation.
- Calculated as current assets less current liabilities. For further information, please see the "Liquidity" section of this MD&A.
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Management's Discussion & Analysis - 2023
Select Quarterly Financial Information
The following table presents selected quarterly financial information for our eight most recently completed financial quarters.
2023 | ||||
($000s, except as otherwise indicated) | Q4 | Q3 | Q2 | Q1 |
Key performance drivers 1: | ||||
AUA - ending2 ($ millions) | 35,236 | 34,726 | 35,788 | 35,965 |
AUA - average2 ($ millions) | 34,926 | 35,630 | 35,880 | 35,872 |
Fee revenue | 63,623 | 65,505 | 64,047 | 62,532 |
Fee revenue3 (%) | 89 | 91 | 90 | 89 |
Adjusted operating expense ratio4 (%) | 71. 5 | 67.3 | 70.9 | 74.7 |
Adjusted EBITDA margin5 (%) | 16. 7 | 19.3 | 16.9 | 14.9 |
Asset yield6 (%) | 0. 86 | 0.87 | 0.86 | 0.86 |
Advisory teams7 (#) | 157 | 159 | 158 | 159 |
Operating Performance: | ||||
Reported results: | ||||
Revenue | 86,752 | 87,836 | 88,832 | 87,700 |
Advisor variable compensation | 35,866 | 36,012 | 37,305 | 36,095 |
Gross margin8 | 50,886 | 51,824 | 51,527 | 51,605 |
Operating expenses1,9 | 36,368 | 34,892 | 36,947 | 42,647 |
EBITDA1 | 14,518 | 16,932 | 14,580 | 8,958 |
Interest | 3,994 | 3,527 | 3,675 | 3,511 |
Depreciation and amortization | 6,849 | 6,856 | 6,805 | 6,895 |
Advisor award and loan amortization | 5,844 | 4,457 | 3,884 | 4,201 |
Income (loss) before income taxes | (2,169) | 2,092 | 217 | (5,649) |
Net income (loss) from continuing operations | (2,882) | (189) | (1,425) | (5,332) |
Net income (loss) from discontinued operations10 | - | - | (2,064) | - |
Adjusted results 1: | ||||
Operating expenses9 | 36,368 | 34,892 | 36,533 | 38,546 |
EBITDA | 14,518 | 16,932 | 14,993 | 13,059 |
Income (loss) before income taxes | 1,094 | 5,355 | 3,892 | 1,715 |
Net income (loss) | (483) | 2,209 | 1,279 | 105 |
Cash flow: |
2022 | |||
Q4 | Q3 | Q2 | Q1 |
34,948 | 33,604 | 33,841 | 37,084 |
34,788 | 34,679 | 35,607 | 36,629 |
62,625 | 61,974 | 62,312 | 67,890 |
90 | 92 | 81 | 89 |
68.1 | 66.9 | 67.9 | 76.9 |
19.2 | 19.8 | 18.3 | 12.5 |
0.87 | 0.86 | 0.82 | 0.85 |
163 | 162 | 162 | 160 |
88,531 | 85,928 | 90,753 | 88,760 |
35,276 | 34,555 | 39,078 | 40,839 |
53,255 | 51,373 | 51,675 | 47,921 |
38,868 | 36,435 | 37,493 | 38,412 |
14,387 | 14,938 | 14,182 | 9,509 |
3,293 | 3,015 | 2,348 | 2,140 |
7,851 | 6,936 | 6,743 | 6,534 |
4,634 | 4,381 | 4,240 | 4,012 |
(1,391) | 606 | 851 | (3,177) |
(991) | (724) | 58 | (3,147) |
- | - | - | - |
36,246 | 34,380 | 35,078 | 36,869 |
17,009 | 16,993 | 16,597 | 11,052 |
4,493 | 5,924 | 6,529 | 1,629 |
3,500 | 3,197 | 4,010 | 393 |
Cash provided by (used in) operating activities | 2,834 | 16,624 | 25,741 | (313,698) | (93,752) | (283,619) | 213,248 | 56,721 | |
Free cash flow available for growth1 | 8,312 | 11,180 | 8,746 | 7,162 | 10,761 | 12,357 | 11,511 | 5,569 | |
Free cash flow1 | (9,612) | 6,151 | 7,206 | (6,309) | (4,011) | (1,148) | (3,591) | (1,146) |
- Considered to be non-GAAP or supplementary financial measures, which do not have any standardized meaning prescribed by GAAP under IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. For further information, please see the "Non-GAAP and Supplementary Financial Measures" section of this MD&A.
- AUA is a measure of client assets and is common in the wealth management business. It represents the market value of client assets managed and administered by us.
- Calculated as fee revenue divided by commissionable revenue. Commissionable revenue includes wealth management revenue and commissions earned in connection with the placement of new issues and the sale of insurance products.
- Calculated as adjusted operating expenses divided by gross margin
- Calculated as Adjusted EBITDA divided by revenue
- Calculated as wealth management revenue plus interest on cash divided by average AUA
- Prior year has been revised to reflect the internal consolidation of certain teams
- Calculated as revenue less advisor variable compensation. We use gross margin to measure operating profitability on the revenue that accrues to the Company after making advisor payments that are directly linked to revenue.
- Operating expenses include employee compensation and benefits, selling, general, and administrative expenses, and transformation costs and other provisions. Adjusted operating expenses are calculated as operating expenses less transformation costs and other provisions.
- In Q2 2023, we recorded a provision for a legacy employment litigation matter related to the 2019 sale of our capital markets business to Stifel Nicolaus Canada Inc. See Note 25 to the 2023 Annual Financial Statements.
7
Committed to ESG
We are guided by what we believe is right for our community, advisors and their clients, and our business
RF Capital is committed to integrating an environmental, social, and governance (ESG) lens into every aspect of our business.
We are committed to ESG principles that help us thrive in a socially responsible manner and operate with the highest standards of ethical behavior.
The Company is a member of the Responsible Investment Association (RIA).
Please refer to our 2023 Management Information Circular and Annual Information Form for more information on our ESG philosophy.
Our 2023 ESG milestones:
Environmental
- Relocated our Kitchener office to a new Gold LEED Platinum certified building
Social
- Expanded a Core Leadership Development program for all corporate executives, targeting change management
- Recognized as a Best Workplace in Financial Services and Insurance for the fifth straight year by Great Place to Work®
- Launched a DEI Council and introduced a new Employee Resource Group for women
- Based on Investment Executive's 2023 Brokerage Report Card, scored:
- 8.9/10 overall, tied for 2nd out of 14 firms surveyed
- 9.6/10 on our Diversity, Equity & Inclusion Policies
- Through our DEI efforts, we supported: National Day for Truth and Reconciliation, theBlack Opportunity Fund, Pride at Work Canada, as well as Black, African & Caribbean and Pride Employee Resources Groups
- In support of women, we sponsored WXN Top 100 Women awards and Dress for Success
- In support of our communities, we sponsored the Kidney March, a Wine & Words event, and the Million Reasons Run
- Commenced our Illumination initiative with the intent of achieving gender parity among our Advisors
- Began a program to demonstrate enhanced cultural sensitivity towards French-speaking stakeholders and to comply with
Quebec's French Language law, Bill 96
Governance
- Conducted a talent assessment and developed succession plans for company executives
- Updated our Code of Conduct and added a formal whistleblower policy
- Initiated an advisor succession program
Management's Discussion & Analysis - 2023
Business Overview
Headquartered in Toronto, RF Capital is a public company listed on the Toronto Stock Exchange (TSX) and its common and preferred shares trade under the ticker symbols TSX: RCG and RCG.PR.B. Its wholly owned subsidiary, Richardson Wealth, is one of the largest independent wealth management firms in Canada with 157 investment advisor teams serving 31,000 households out of 22 offices. It operates as Patrimoine Richardson in the francophone market. Richardson Wealth advisors collectively manage $35.2 billion in client assets and provide a comprehensive suite of wealth management services including investment, financial planning, insurance, and tax and estate planning services.
Richardson Wealth consistently ranks amongst the top firms in Canada in Investment Executive's Brokerage Report Card. In 2023, it ranked third among six banks and eight independents with a Net Promoter Score of 74, which is considered exceptional. For the fifth year in a row, Richardson Wealth has also been named on the 2023 list of Best Workplaces™ in Financial Services & Insurance by Great Place to Work®, a global authority on workplace culture.
To read more about the Company please visit the Company's website at www.RichardsonWealth.com.
$35.2B
AUA
157
Number of advisory
teams
$224MM
Average AUA
per team
Vision
To be the brand of
choice for Canada's top advisors and their high net-worth clients
Share Ownership
Richardson Financial Group | 44% |
Advisors & employees | 30% |
Public shareholders | 26% |
89% | 22 |
Recurring fee-based | Offices across |
revenue | Canada |
9
Management's Discussion & Analysis - 2023
Our Growth Strategy
Background
Independent wealth management firms across Canada are enjoying a renaissance of a bygone era when the name on the door mattered, capturing the imagination of a growing number of advisors and high-net-worth families opting to leave bank owned firms and other large financial institutions for the personal, high touch experience of a boutique firm like ours. To capitalize on this trend, we have invested in a number of initiatives to position ourselves for success, including:
- promoting the rich 90-year history of the Richardson brand in financial services;
- developing and securing buy-in to a clear three-pillar growth strategy;
- cultivating a strong advisor centric culture;
- building a highly scalable platform that offers advisors Fidelity's digital operating platform, and portfolio management solutions by Envestnet and Croesus;
- opening new offices across the country;
- investing in a variety of services to support advisors including in the areas of portfolio analytics, research, tax and estate planning, insurance, practice management, and marketing;
- attracting a board and management with deep expertise in the financial services industry;
- furthering our commitment to our communities, and to our diversity and inclusion initiatives; and
- building, and continuing to convert, a robust recruiting pipeline.
We expect a favourable long-term industry outlook to support our growth strategy. Retail financial wealth is projected to grow from approximately $5.6 trillion in 2021 to nearly $10 trillion by 20301. Our market share is only 0.7%, so there is ample opportunity for us ‒ as an independent wealth management firm with national scale ‒ to gain share of this growing industry.
Three-Pillars of Growth
The growth strategy that we announced in 2021 includes three pillars: doubling down on advisor support, supercharging advisor recruitment, and acquiring or partnering with like-minded firms. Each pillar and our priorities for the upcoming year are discussed below.
There are risks associated with each pillar and with our ability to achieve our growth aspirations. For more details on these risks, please refer to the "Risk Management" section of this MD&A which begins on page 26.
Doubling-down on support for advisors: one-fifth of total expected long-term growth
The first pillar of our plan is about giving advisors the tools they require to exceed the expectations of their existing clients and to attract new ones. Going forward, our expectation is that this pillar will drive 6% average annual growth in our AUA. We anticipate that the market-driven component of this growth will average 4%, assuming a constant AUA mix. Further, we expect to boost organic earnings growth and our margins by uncovering efficiencies in our business.
1 Investor Economics - Household Balance Sheet Report 2021
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RF Capital Group Inc. published this content on 01 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 March 2024 15:19:05 UTC.