LPL Forecasts Up to $100 Million of Retention Pay to NPH Brokers
The expenses that LPL expects to incur in transferring National Planning Holding customers and brokers to its platform will be far offset by the additional revenue it will get from using NPH cash balances more efficiently, getting more product sponsor fees and converting more of NPH’s brokerage assets to fee-based accounts, LPL executives said Wednesday.
LPL, which services more than 14,000 independent brokers, hopes to persuade NPH’s 3,200 brokers to move by offering them about $100 million of “onboarding assistance,” primarily in the form of forgivable loans, Chief Executive Dan Arnold told analysts on a conference call.
It also will cover account closure and transfer fees and ameliorate the normal pains of switching platforms by offering an “automated, large-scale, negative consent process” for most assets, in which customers would actively have to object to a transfer. LPL also plans to pre-populate repapering forms with existing data to simplify the process for brokers.
LPL forecast that the acquisition can add $75-$100 million to its annual earnings before interest, taxes, depreciation and amortization by mid-2018, based on the percentage of NPH broker production it succeeds in retaining. It estimated its total “onboarding” costs of NPH advisors and accounts to be $40-$60 million, and said that amortization of forgivable loans will be accounted for as “promotional expenses.”
LPL’s challenge is persuading brokers at NPH’s four broker-dealers that they will be happier and more prosperous, given that NPH has been suffering a high attrition rate, with a 15-16% loss of net new advisors at its four broker-dealers over the past four or five years, according to analysts on the call.
Arnold said he sees the chance to improve retention as “an opportunity” that LPL can grab by giving them a better advisory platform, an up-to-date DOL-compliant brokerage platform and enhanced service and technology to improve their and their clients’ experiences.
LPL, for its part, hopes to leverage its bank-sweep program and sponsor fees by attracting more of NPH customers’ cash balances away from third-party sponsors, growing fee revenue as NPH brokers shift closer to LPL’s 55-45% brokerage/advisory account mix from their 75-25% mix and uses its enhanced revenue potential to book higher product sponsor fees. About 3% of NPH customers’ assets are currently in cash compared with about 5% in cash for LPL customers.
“Sponsors value our scale,” Arnold said, while NPH customers will appreciate getting FDIC insurance on their cash balances and higher money-market yields.
Executives also said that expenses will drop as a result of processing NPH transactions and record-keeping through its self-clearing operations.
LPL on Tuesday paid $325 million to buy the assets of NPH’s four broker-dealers and may add $123 million more based on the percentage of production transferred by the end of next year’s first quarter. The contingent payment ranges from $17 million if 72% to 75% of production is transferred to a ceiling of $123 million for hitting a transfer target of 85% to 93.5%.
LPL officials said on Wednesday that they consider a 70% retention level a good average outcome in a typical acquisition, but did not comment on their expectations for the NPH deal. Brokers at the four broker-dealers — INVEST Financial Corporation, Investment Centers of America, National Planning Corporation and SII Investments — oversee about $120 billion of customer assets.