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LPL Financial shares hit rough patch on $18-million surprise as RIAs now represent the vast majority of the firm's business development

Wall Street dings the IBD for spiralling compliance costs but hybrid RIA assets are serious bright spot

Thursday, October 23, 2014 – 3:44 AM by Brooke Southall
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Robert Moore: Today, our independent RIA business accounts for approximately 65% of our new business development.

In advance of its scheduled Oct. 30 release of third-quarter earnings, LPL Financial LLC announced today that it expects to incur greater than expected charges totaling $23 million in that quarter — charges associated with regulatory matters relating primarily to LPL Financial’s systems, policies and procedures.

The $23 million represents $18 million more than anticipated, leading to an expected impact of 11 cents on diluted earnings per share. This revelation pushed its share price down 6.59% yesterday to $40.26. LPL shares traded as high as $56 in March and $48.65 in mid-September. See: LPL gets the question from Wall Street analyst: How much more can you squeeze from your financial advisors?.

But amid all that effluent of dealing with stockbrokers and the costs of keeping them in line came welcome news out of LPL’s RIA conference — the 2014 ADVocate RIA Symposium held in Austin, Texas earlier this month, which assembled 100 of LPL’s top firms representing $43 billion of assets under advisement. See: LPL Financial gets beyond the halfway-house model to compete with Schwab, Fidelity for advisors that are wholly RIAs.

The LPL unit for advisors registered directly with the SEC has hit $78 billion and this nascent RIA custody business is currently the primary engine of new assets at the company.

The RIA unit that could

“Today, our independent RIA business accounts for approximately 65% of our new business development,” said Moore in a release from the event that was held Oct. 13 and 14. See: LPL makes big advance into the RIA business with Fortigent acquisition.

In an interview from the event, Moore adds that the load being carried by this small unit is catching the notice of the bigger firm.

“We think that’s really an incredible accomplishment.”

That’s especially true considering Boston-, Charlotte NC- and San Diego-based LPL has just 282 firms with $78 billion in assets under custody using its RIA platform, up from $49.8 billion in June 2013. LPL has about an additional 13,500 non-RIA advisors using its IBD platform and 4,400 advisors using its broker-dealer through insurance companies.

The RIAs driving these sales include some OSJs or offices of supervisory jurisdiction, but not all OSJs are counted as RIAs. See: LPL reaches hard-won agreement to rein in bonuses to big advisors that had proved to be overly generous.

The way LPL calculates RIA assets differs from other custodians. It counts the brokerage assets held by those 282 hybrid practices in addition to the assets held under their RIAs. See: LPL Financial gets beyond the halfway-house model to compete with Schwab, Fidelity for advisors that are wholly RIAs.

Unsustainable — and that’s OK

But despite the shining performance of the RIA unit, Moore expects the classic IBD platform to carry more of the business development load going forward.

“We don’t plan for the level [of assets gathered by RIAs] to be sustained,” he says. “We don’t aspire to be a standard RIA custodian.”

Indeed, Moore says LPL does not typically win assets directly from custodians like Schwab Advisor Services, TD Ameritrade Instituional and Fidelity Institutional Wealth Services.

“We’ve won assets from every channel out there but the majority are forming their RIA for the first time.” See: As LPL Financial braces for a share sell-off and loss of two directors, a Citi analyst says it’ll be good.

The intra-LPL success of the RIA channel may also reflect lingering effects of its tough start to the recruiting year — an effect of the frigid winter weather that chilled prospects’ signing hands. Still, the company said in September that it is regaining its recruiting mojo and may nab as many as 500 new reps in 2014.

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Mentioned in this article:

Fidelity Clearing & Custody Solutions
Asset Custodian
Top Executive: Sanjiv Mirchandani

LPL Financial
Asset Custodian
Top Executive: Dan Arnold

Stephen Winks

Stephen Winks

October 23, 2014 — 2:59 PM

The inevitable evolution continues as scale for RIAs emerges and the differences between accountability and responsibilities for recommendations becomes clear and the consumer protections afforded the investor are differentiated and the professional standing of the RIA is established. The industry would be foolish to ignore what the marketplace is telling us. Don’t be surprised that the Advisor business model supplants the broker business model at the industry’s largest independent b/d. The industry’s aversion to innovation is becoming its most attractive path to growth. This is not a conscious move by LPL as it is still pushing back on innovation, but simply reflects the workings of the free market in support of the best interest of the investing public. LPL will look significantly different a decade from now than it does today as it is in its enlightened self interest to become an incubator for advisors rather than yet an another outdated platform for brokers.


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