LPL Banks on New Employee Model, Expanding Affiliation Options

2 Feb    Investing News

(Updates top four paragraphs with additional details on new channels.)

LPL Financial is touting its new employee affiliation model and other new channels in its continuing drive to add brokers and customer assets.

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The broker-dealer, which works with almost 16,500 independent-contractor brokers who are the core of its earnings engine, has two teams lined up to join a “premium” channel that LPL began marketing in the fall to wirehouse brokers, Chief Executive Dan Arnold said on the firm’s fourth-quarter earnings call Thursday evening.

“After bringing it to market in the third quarter it’s been well received,” he said. “We are encouraged by our growing pipeline of interested advisors.”

Arnold said LPL plans to roll out two other affiliation models later this year, including one in the second quarter and one later this year, without providing details. One is an employee channel created by LPL’s purchase of the 33-advisor Allen & Company of Florida broker-dealer last August. Arnold said LPL is also creating an offering for independent registered investment advisers who are 100% fee-based, as opposed to the hybrid brokerage-advisory practices of most of its sales force.

“Our whole mantra is we have to meet them where they are in the evolution of their practices,” Arnold said.

LPL’s multi-channel strategy is a mirror image of some conventional firms that have been expanding through independent channels. Raymond James Financial Services and Wells Fargo Advisors offer independent contractor and RIA channels to supplement their flagship private wealth offices. Oppenheimer & Co., the much smaller New York-based regional firm, has said in regulatory filings that it is considering an independent channel.

“As we look ahead, we believe enhanced performance in our traditional markets, combined with new affiliation models, can drive our recruiting results over time,” Arnold said after LPL reported a 2% jump in its sales force during the fourth quarter as it added a net 115 brokers.

Independent contractors retain roughly twice the fees and commissions paid by their customers as do employee brokers, but pay for their overhead and most of the operational services provided by their broker-dealers. The higher payouts that can reach over 90% of revenue brokers collect create a challenge for independent firms, and an ongoing effort to generate volume through recruiting.

LPL ended 2019 with 16,464 advisors, up 355 from 12 months earlier. The new brokers had overseen $35 billion under their former affiliations, a record potential asset-build for LPL, which recruited advisors with $32.9 billion of client assets in 2018. (The firm added 554 brokers, gross, last year, but the net number was impacted by the departure of Independent Financial Partners, a Florida affiliate that set up as its own broker-dealer last May,)

LPL’s fourth-quarter net income rose 5% from the previous year to $127 million, and revenue jumped 10% to $1.45 billion, the company reported.  Its expenses were up 11% to $1.25 billion, driven by a 12% rise in compensation and benefits costs.

The amount of “transition assistance,” or recruiting bonuses, that amortized during the quarter rose 23% to $26.1 million in the quarter.

LPL chief financial officer Matt Audette said on the call that LPL has not changed its deal, which typically is based on forgivable loans amortizing over five years, but is absorbing higher expenses because of recruiting volume.

The company added a net $8.8 billion in net new assets in the fourth quarter, up from $5.9 billion a year ago. Its total customer assets under management rose 22% to $764.4 billion from $629.1 billion at the end of 2018.

The average LPL broker generated $246,000 in annualized revenue in the fourth quarter, up 5% from the 2018 quarter. That is well below the million-dollar-plus averages that wirehouses such as Morgan Stanley, Merrill Lynch and UBS Wealth Management report, and also trails the $664,000 average that Ameriprise reported for its mix of independent- and employee-channel brokers this week.

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