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LPL Financial wins more breakaway brokers by sacrificing a revenue stream

Morristown Financial Group finds lucrative niche by taking over some supervisory duties from fellow brokers

Wednesday, October 21, 2009 – 4:08 AM by Elizabeth MacBride
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Patrick Sullivan has brought 80 fellow advisors under his firm's compliance umbrella

An LPL advisor selling office supervisory services to other LPL groups is not only sitting on a diamond mine, say observers – it may be modeling a way to help advisors on broker-dealer platforms cope with the heavy compliance burden that has long been a fundamental problem of the broker-dealer world.

Morristown [N.J.] Financial Group, one of the largest LPL advisors in the country, has turned its in-house compliance team into a business, charging other advisors a percentage, typically less than 2%, of their production to handle their office supervisory responsibilities.

Though other LPL advisors offer similar services, Morristown is actively marketing, winning accounts by the dozen and appears to have the embrace of LPL Financial itself.

When it is recruiting breakaways, LPL refers them to Morristown to help with compliance needs. Aid with compliance is a key selling point to brokers coming from wirehouses, which handle all of their compliance for their employees.

Morristown is selling to a nearly captive audience. The more than 12,000 advisors on the LPL platform have three options for office supervision: they can do the compliance themselves; outsource to another LPL advisor, or pay LPL itself to do it for them.

“What we’ve found over the years is that it is taking up more and more time. If a group of friends sets up a practice, the person who is put in charge of this is spending 20-25 hours a week,” says Patrick Sullivan, Morristown managing partner. One of the chief advantages of the service Morristown is offering, he says, is that it enables advisors to focus on their own businesses.

J. Peter Foster’s six-advisor group, Moorestown Wealth Management, signed on with Morristown after leaving A.G. Edwards. He had been a vice president at Merrill Lynch before that.


“We basically have a full-time compliance platform with Morristown,” he said. “That’s invaluable.”

He gave examples of the kinds of services Morristown performs, everything from checking that clients receive proper documentation, to reviewing files, to making sure that advisors all sign to indicate they’ve seen advisor alerts sent out by LPL.

Morristown has won 10 advisors as clients since August, when it began marketing Advisor AdvantEDGE. It now has a compliance team of four people to serve the total of 80 advisors under its office supervisory umbrella.

Morristown, which has $1.8 billion under management, ensures that broker-dealers, RIAs and combination offices have the procedures in place to comply with regulations imposed by FINRA and the SEC. LPL is still responsible for higher-level compliance, such as surveillance of accounts and branch exams.

Broker-dealers tend to be very strict about compliance because they can be held liable, by FINRA, the SEC or civil courts, if an advisor on their platform is practicing fraud or makes a mistake. The broker-dealer compliance burden helps persuade some advisors to make the full vault to independence.

“We get phone calls from a large number of clients that are looking to leave because of high compliance,” says Zachary Gronich, president of Houston-based RIA In A Box, which helps advisors set up RIAs with state regulators and the SEC. “Because of the compliance from LPL or any broker-dealer for that matter.

Great business idea

That heavy burden is the reason Gronich says Morristown has hit on a great business idea.

“They have absolutely found a niche market,” he said.

It is not clear that Morristown, which charges as much as 7-8% of production for a few advisors, would be a great deal in the world outside LPL. Some compliance outsourcing firms price their services more on a law firm or accounting firm model, such as ACA Compliance Group of Washington, D.C.

Rather than take a percentage of advisors’ business, says partner Ted Eichenlaub, ACA negotiates annual fees ranging from $5,000 to upwards of $125,000 based on the package of services provided. ACA has grown from five employees when it was founded in 2002 to about 75 today.

“We are bullish on regulations,” says Eichenlaub.

Gronich also charges flat fees for services including annual renewals ($450) and mock audits ($1,350).

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