The big IBD also confirmed long-whispered rumors that it's begun to offshore some operations

October 31, 2012 — 7:00 PM UTC by Brooke Southall and Lisa Shidler and Brooke Southall


Brooke’s Note: One way, from a reporter’s perspective, you can tell a company is growing up is by the way it delivers news — good, bad and potentially inflammatory. LPL had one heck of a quarterly earnings call today with news that fit all those categories. It was Mark Casady’s language and tone — pretty matter of fact — that stood out for me as much as the interesting nuggets.

With investors nervous about the markets and 181 advisors leaving in the third quarter, LPL Holdings saw its income drop to $34.3 million, down $2.1 million from $36.4 million a year ago as the nation’s largest independent broker-dealer has its sights set on cost reductions by outsourcing and cutting bonus rates to some of its largest firms.

The loss of one group of advisors — because a bank customer chose to consolidate its operations onto its parent company’s broker-dealer platform — and a gain of 166 others, meant LPL had just a net loss of 15 advisors in the third quarter. The Boston and San Diego-based company’s goal is to bring in 500 advisors for the year. See: 19-advisor firm in Santa Monica jumps to LPL with social media-fueled strategy for the underserved under-40 set.

Mark Casady, LPL Financial chairman and CEO was philosophical about the loss during an earnings conference call this morning.

Not glorifying it

“This is the first time we’ve ever lost a large client,” he said. “It’s a moment in time. I don’t want to adjust my way to glory but the underlying strength of the enterprise is quite good. What makes this unusual is the bank didn’t go to a competitor.”

Even though income was down, assets under custody grew 75.2% to $35.4 billion as of Sept. 30, encompassing 180 RIA hybrid firms compared to $20.2 billion and 142 RIA firms as of Sept. 30, 2011. Of the $35.4 billion in custody, $18.6 billion were in fee accounts and $16.8 billion were in brokerage accounts.

But, despite bright spots, there’s no question it was a weak quarter, and Casady says that the firm is looking hard at ways to lower costs and one giant move the company made was ironing out a deal among some of its largest advisory firms to reduce advisors’ production bonuses. See: LPL sees bright spots amid sideways 4Q earnings report.

Deal with its largest firms

Casady declined to delve into details about the deal his firm hashed out with some of its largest firms and he also didn’t name the firms. But RIABiz has written a great deal about these giant firms, which include Private Advisor Group in Morristown, NJ headed up by John Hyland, which had assets of more than $7 billion at the end of 2011. Another like-minded firm is Tampa-based Independent Financial Partners with assets of more than $10 billion earlier this year and had more than 400 advisors in its network. See: What LPL’s recruitment of a $2-billion beehive of NPC advisors says about its new sweet spot in the industry.

Industry leaders have maintained these giant firms are both a blessing and a curse for LPL. Certainly, their revenues are significant to the firm but because of their scale LPL must offer a very high payout to them.

Casady says that LPL is working to help increase recruits for these firms. “We really want to help them with their business planning and support,” he says. “They’re growing and they’ve been incredibly helpful. We feel good about being able to work with them.”

But he did acknowledge that the deal his firm hashed out will slow the “growth for the production bonus by about half.”

Increasing outsourcing

In addition, the company is working rapidly to trim its costs by increasing outsourcing efforts that began 18 months ago. LPL has been working with Bain & Company and Accenture paying them about $2 million to achieve these goals.

Consultants at Bain are helping LPL investigate its technology strategy and the company is increasing technology expenditures based on Bain’s recommendations. He declined to go into specifics.

“We think it’ll lead to greater productivity and more tools,” Casady says. Accenture has been helping the firm create more lean processes and helped them to outsource,” he says. “We’ve already experimented with outsourcing for the last 18 months and have partnered with a number of vendors who have been excellent in quality and costs.”

He says the outsourcing efforts have helped the company set up new accounts in three days compared to seven days in the past. He also says that quality scores are up to 98% from 93%.

The concern with outsourcing from the perspective of financial advisors is that their sensitive data ends up in foreign countries.

But in an interview after the earnings call, LPL chief financial officer Dan Arnold said that his company does not have any sensitive advisor information flowing through outsourced locations currently. Still, he allowed that as LPL continues to exploit outsourcing that it may involve client data. He says the company will endeavor to do it in the most thoughtful of manners. See: LPL cannibalizes executive talent and launches mass-market entity.

Post-election easing

Casady also says he believes that when the election occurs next week it’ll take some uncertainty away from advisors. “People don’t know what to do with the possible tax changes,” he said. “How do you position your portfolio without knowing what will happen with taxes. You’ve got such a lack of clarity — a fog if you will — over the tax situations and it’s prudent for advisors to say let’s dollar cost average and let’s see what we learn next week with the election.”

Surviving Sandy

Casady also told investors on Wednesday that his firm survived Hurricane Sandy with relative ease. “We had offices that were closed for a day or two, but no employees were harmed,” he says. “We’ve called out to all of our institutional customers and independent practices and there were no injuries and no severe losses to those customers.” See: How RIA business players in New York are roughing it through Hurricane Sandy.

Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Bill Morrissey

Private Advisor Group
Specialized Breakaway Service, RIA-Friendly Broker-Dealer, RIA Serving Other RIAs
Top Executive: John Hyland

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