LPL Raises Curtain on New Employee Channel
LPL Financial, the largest provider of brokerage services sold through independent contractors, has unveiled a new “channel” for brokers who want to join as employees with more support from the company than their fully independent colleagues.
In return for firm-provided technology, office space, benefits and back-office services, brokers who want “ownership of their book of business” but are willing to keep a smaller percentage of fees and commissions can receive grid-based payouts of 50% to 70%, LPL said Wednesday. (The top number requires annual production of at least $5 million.)
Proponents of the independent model argue that it offers brokers greater autonomy in managing their practice than do firms with employed brokers, and LPL said its modified new model retains the benefit.
“Advisors own the clients, and we don’t tell them what to do,” said Rich Steinmeier, who joined LPL as head of business development two years ago after a decade at Merrill Lynch and UBS. “There are no restrictive compensation policies.”
For example, he said, LPL will not impose small-household payout penalties that have been adopted at wirehouses and many regional firms, including RBC Wealth Management, on accounts with less than $250,000 in some cases and $100,000 in others.
LPL, which went public in 2010 and affiliates with almost 17,000 brokers, depends on recruiting as a key growth metric and earlier this year said it was planning an employee model. It has been introducing new channels to take advantage of economies of scale and to expand margins constricted by high payouts.
To promote the new channel, the firm is guaranteeing that revenue thresholds for grids will remain constant for the duration of the seven-year promissory note agreement signed by most recruits, Steinmeier said. UBS and Morgan Stanley raised production hurdles this year so that many brokers must produce more to earn the same payouts as in 2019. (Morgan Stanley in March delayed imposition of the tougher grid until October to accommodate coronavirus challenges.)
LPL is hoping the modified model will attract at least some of the approximately 7,000 employee-channel brokers who move each year, said Steinmeier, noting that about 70% of those brokers remain as W-2 employees.
Jon Henschen, an industry recruiter who works with independent brokerage firms, said that LPL’s brand name may be compelling to wirehouse advisors who may feel frustrated but still want a broad product platform and scale advantages that many independent firms lack.
“LPL has self-clearing, scale and a broader selection of products than are typically available,” said the Minnesota-based recruiter.
But selling the employee model at a time when work-from-home restrictions are in place may be difficult, Henschen said. Advisors working from home are finding that their dependence on on-site managers and in-house physical support are less important, which could convince more of them to go fully independent at higher payouts with LPL or other firms.
He also cautioned brokers shifting from employee models to closely review the details of service and product costs that are often hidden in independent brokerage firms’ complex contracts. Separately managed accounts and unified managed accounts, for example, are significantly more expensive at independent broker-dealers that cannot command the volume discounts of wirehouse platforms.
“I have seen sticker shock for wirehouse reps,” Henschen said. “Often they feel like they’d be doing their clients an injustice by increasing expenses so much.”
LPL, for its part, can beat wirehouses on compensation and costs because it does not have to support a complex field management structure and has lower margin expectations, Steinmeier said.
“Not replicating an infrastructure that we’re dubious about,” he said, “gives us a sustainable ability to outpace competitors.”
LPL signaled its intent to blur its independent roots last August when it bought Allen & Co., a small employee-model brokerage firm in Florida. In April, it launched Strategic Wealth Services, a “premium” channel aimed at wirehouse brokers with at least $200 million in assets that offers payouts of 60% to 80%. It has attracted two teams.
LPL also offers advisory accounts to brokers who want to custody those assets through the firm’s registered investment adviser, and plans to supplement the hybrid model with a pure RIA custody offering on its corporate platform in coming months.
“We get more swings in the batter’s box with these new markets,” LPL Chief Executive Dan H. Arnold said on the company’s second-quarter earnings call last week.
LPL as of June 30 had 16,973 brokers, up a net 812 from a year earlier. Its average broker produced $226,000, down 5% from $238,000 in the year-earlier quarter, and significantly below the million-dollar-plus averages at Merrill Lynch, Morgan Stanley and UBS.
The new LPL channel resembles the “Profit Formula” model that Wells Fargo Advisors once marketed to brokers who wanted more support at a lower payout than was available to independent brokers in its Financial Network (FiNet) channel. Wells in recent years has not recruited into Profit Formula, which it inherited when it bought Wachovia Corp. and its Wachovia Securities unit in January 2009.