By Cyril Tuohy
There are two ways to check the pulse of how well the nation’s independent broker-dealers are doing: The first is to ask them. The second is to take a peek at the latest goings-on at LPL Financial, the nation’s fourth largest broker-dealer.
In the vast world of broker-dealers and advisors who manage trillions of dollars in assets on behalf of tens of millions of investors, LPL Financial matters because the company has staked its future on serving independent advisors.
Independent advice is what retirement investors say they want.
LPL was born of a 1989 merger between Linsco Financial Group and Private Ledger Financial Services.
Over the years, the company has grown through a host of acquisitions and ranks, behind only Bank of America, Wells Fargo Advisors and Morgan Stanley Wealth Management among broker-dealers in the U.S.
As of Sept. 30, there were 13,563 advisors working for LPL, a 3 percent increase from a year ago, the company said. Advisory and brokerage assets were $414.7 billion, an increase of 11.7 percent over a year-ago, and advisory assets under custody were $141.1 billion, an increase of 19 percent over Sept. 30, 2012.
“We believe that independent, objective financial guidance is a fundamental need for everyone,” the company said, in a recent 10-K filing.
This philosophy has been resonating with customers. The company’s third-quarter growth was strong. LPL Financial Holdings, the parent company of LPL Financial, reported third quarter net income of $37.6 million, an increase of 9.7 percent over the $34.2 million in the year-ago period. The company also reported net earnings of $0.36 per common share diluted, an increase of 16.1 percent over the $0.31 per common share diluted in the year-ago period.
Revenues were $1 billion, an increase of nearly 16.1 percent from $907.2 million in the year-ago period, the company also reported.
The number of net new advisors to the firm grew by 154 in the third quarter and 393 in the past 12 months, a sign of “advisors’ strong and sustained desire to migrate to an independent business model,” said Mark Casady, chairman and chief executive officer of LPL Financial.
Though LPL has little more than 4 percent of the approximately 320,000 advisors in the U.S., senior executives at the company say that this number should increase. This is due to LPL’s flexible technology platform, its fee structure, and the future growth of the market segments that LPL advisors serve. Executives also say that LPL will benefit from the flow of assets out of retirement plans and into individual retirement accounts (IRAs).
Mass affluent retail investors, those with more than $100,000 in investable assets, are demanding more financial advice from independent sources. As they do, independent advisor channels are gaining in terms of market share at the expense of captive channels.
In a recent filing, LPL said it believes the company is not only the beneficiary of a shift toward independence, but by forming RIAs and registering directly with the Securities and Exchange Commission, the company was an “active catalyst” in the movement to independence on the part of advisors.
“We’ve seen a significant increase in the independent advisor market share from 29 percent in 2007 to more than 34 percent in 2011,” Scott Smith, a director at Cerulli Associates, said in an August research note.
High payout ratios to its fee- and commission-based advisors also provide a major draw, the company also said. “Our year-to-date production retention was 97 percent, which we believe continues to lead the industry,” Casady said.
Even with the built-in economic advantages that appear to be drawing independent advisors toward its orbit, attracting and retaining them hasn’t been without its challenges, as advisors have complained in the past about problems with LPL Financial’s technology platforms.
Technology systems integration is never easy as new advisor shops are added to LPL’s systems and new layers of regulations need to be coded into the systems. Earlier this year, the company hit a low point when the Financial Industry Regulatory Authority fined LPL $9 million for failing to supervise as many as 28 million emails, and dragging its feet in reporting the violations.
Casady said the company has overcome the setbacks by investing heavily in technology upgrades, and by paying more attention to the service LPL provides its advisors. This comes as old-line wirehouses are competing to keep advisors while LPL tries to lure them away.
“Combined with the progress we’re seeing from investments we’ve made to deliver new technologies and a ‘smarter, simpler, more personal’ service offering to advisors, we believe we will achieve greater efficiency and scale in 2014,” Casady said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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