LPL Looks Beyond Indie Roots with New Employee Channel
LPL Financial, the nation’s largest independent broker-dealer, will use its acquisition of Allen & Co. of Florida to seed a new business channel of brokers who work as full-time employees, executives said on Wednesday.LPL announced its plan to buy Allen, which has about 30 brokers servicing $3 billion of client assets, after the market closed on Tuesday. It followed Wednesday with an outline of how it hopes to attract advisors from traditional firms with higher payouts, albeit fewer services, than they are used to.
“This is the largest segment of the marketplace, and one we have not traditionally pursued,” LPL business development head Richard Steinmeier said at LPL’s Investor Day presentation in New York on Wednesday. Steinmeier joined LPL last year from UBS Financial Services, where he had most recently overseen the wirehouse’s cut-rate robo-advisory model.
LPL’s decision to push its frontiers after 50 years of thriving by skimming revenue from independent contractors continues an industrywide trend that blurs the lines among wealth management business and compensation models.
Raymond James Financial Services and Wells Fargo Advisors offer a choice of affiliations ranging from their flagship employee private wealth models to independent contractor and quasi-independent models similar to what LPL is proposing. (RayJay calls the hybrid model AdvisorSelect and Wells brands its venture as Profit Formula.)
“It won’t appeal to the entire segment of employee-based advisors, but there’s a big segment, and perhaps as much as a third of the employee segment, that this model would appeal to,” LPL Chief Executive Dan Arnold told analysts at Wednesday’s conclave. “We think we can pay them more because of how we’re approaching it, and different infrastructure requirements.”
Essentially LPL is offering advisors payouts that rise or fall with the levels of support services they want and the overhead expenses they are willing to bear. It also has been liberalizing its policies on allowing brokers who prefer more fee-based business to use outside registered investment advisory firms to custody their assets.
“A lot of wirehouse reps are dysfunctional when it comes to being an entrepreneur,” said Jon Henschen, a Minnesota-based recruiter who focuses on independent brokers. “LPL is creating a path of least resistance for them.”
Arnold and Steinmeier did not discuss specifics of payout at its nascent channel.
Based on the RayJay and Wells models, it will likely range between the 90% level top independent contractors can get and the 50% split kept by so-called W-2 employees, outside recruiters said.
“LPL recognizes that there is some value to being a W-2 plug-and-play model in terms of healthcare and benefits,” said Louis Hanna, a Philadelphia-based recruiter who also focuses on placing independent contractors. “If you’re a recruiter calling an advisor with an interest in the W-2 model, why not mention LPL.”
The employee model, of course, produces higher profit margins and return on assets than the razor-thing contractor model where the firm keeps less than 20% of revenue.
“This model would tend to likely have a higher ROA than some of our normal models,” Arnold told investors.
A spokeswoman for LPL did not return a request for comment as to whether Steinmeier will tweak his recruiting staff to focus on the new channel. The firm has 65 internal recruiters, uses some third-party headhunters and has traditionally drawn most of its recruits from other independent broker-dealers, officials have said.
LPL also told investors Wednesday that it was boosting its 2019 technology spending budget by 11% from its previous estimate to $150 million.
Shares of the company, which trades on the Nasdaq Stock Exchange, were trading up 1.24% in late afternoon trading on Wednesday while the broader stock indexes were down.
LPL did not disclose its proposed acquisition price for Allen, saying it will be an earnout depending on the total client assets transferred within certain time periods. The initial purchase price will be about seven times “post-synergy EBITDA,” LPL said, a crossed-fingers metric that is obviously lower than the actual multiple.
Allen & Co., which was founded in 1932, will continue to operate under the Allen & Co. brand name, the companies said in a news release.