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Why the LPL-Schwab merger rumor making the rounds makes more sense the harder you look

The Boston- and San Francisco-based companies each lead independent channels and redundancies are scarce

Friday, November 18, 2016 – 1:15 AM by Brooke Southall
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Citi's Bill Katz spoke out Thursday to quell rumors about Schwab buying LPL, but only with soft logic.

LPL Financial's shares leapt higher yet again Thursday to finish above $40, up from about $31 as recently as Nov. 3.

This time, it had Chuck to thank.

The Charles Schwab Corp. is the latest company rumored to be in the mix as a buyer for the Boston-based broker-dealer for 14,000 advisors. See: LPL shares spike despite CFO downplay of buyout prospects as CEO Mark Casady reveals 'large programs' at banks are kicking LPL tires

Though the rumor published by StreetInsider was quashed by prominent analyst Bill Katz at CitiGroup, who researches both companies, the shares didn't seem to mind and remained at a 4% premium from where they left off at Wednesday's market close.

Katz assured the markets that Schwab will make no such big bets and that LPL might command a $4 billion price tag. Company execs at San Francisco-based Schwab, which has a $49 billion market capitalization, or 10-fold LPL's, will concentrate on investing capital in bank-sweeping technology and niche acquisitions -- if it is true to its promises, Katz added in press reports. See: Schwab launches biggest RIA-targeted price war in years -- but TD and Pershing say they won't play along

Yet the prospect of a Schwab-LPL merger is almost absurdly tempting, observers say. Each company commands the lion's share of market share in their respective advisory channels. Schwab owns the RIA business with about $1.2 trillion of assets from 7,000 RIA firms and LPL owns the independent rep market with $485 billion from its 14,000 firms. See: Why exactly a $2.2 billion RIA hybrid abruptly dumped LPL for Securities America -- and Schwab, Fidelity and TD Ameritrade.

Filling in gaps

In addition to the surface gleam, the compatibility factor has depth in the details.

LPL has so much of what Schwab doesn't have -- starting with a broker-dealer and a pure B-to-B brand. There's more. LPL is self-clearing, which would give Schwab a footing on that front now enjoyed by Fidelity Investments with National Financial and BNY Mellon with Pershing. LPL has budding bank channel business and OSJs. See: LPL restores OSJ rights to $35-billion AUA super-rep that just kept growing during its three-year ordeal.

Tim Welsh: You shouldn't expect to see LPL brokers in Schwab branches. It's anathema to Chuck's ethos.

Schwab would also fill in some wide LPL gaps. Schwab has a retail brand and the ability to custody RIA assets without charging fees to cover compliance. Schwab has branches. It also has a bank where it can sweep loose cash from advisor clients to generate fat profits. Too, Schwab has its own robo that can be sprinkled like pixie dust to digitize the customer experience. See: Adam Nash makes direct 'CEO-to-CEO' plea to Schwab to rethink its robo

LPL's deal with San Francisco-based FutureAdvisor, by contrast, may limit how much repurposing it can do with such technology. See: LPL unveils BlackRock's FutureAdvisor as its robo partner -- albeit with LPL model portfolios

Each has 401(k) businesses that serves different echelons of the market. See: Why a $1-billion Fidelity RIA is placing LPL at the heart of its 401(k) business

Anathema ... but possible

But as good as it all sounds, Tim Welsh, former Schwab Institutional marketing director and currently president of Nexus Strategy, a consultancy in Larkspur, Calif., says that Katz is likely right -- if for the wrong reasons.

"This reminds me of all the times we looked at buying a broker-dealer when I was at Schwab," he says. "The head of advisory would always say: It's like Disney selling porn."

Nomura analyst Steve Chubak counters that by telling Barron's that “Trump tailwinds could render a deal more viable,” alluding to the possibility that President-elect Donald Trump’s could undo DOL’s new fiduciary rule. He adds in a research note: "There is growing expectation that the DOL rule could be softened under the new GOP (see recent comments from Hensarling), which would remove one of the hurdles to an LPLA takeout."

Welsh allows that times have changed -- hence the jarring aspect of that metaphor -- from 2000 when LPL brokers were more likely to be pushing product than they are today. See: How LPL's CFO answered the Cetera question at Morgan Stanley Financial's conference

And he can see the obvious synergies.

"It would give Schwab distribution and LPL a brand," Welsh says. "But you shouldn't expect to see LPL brokers in Schwab branches. It's anathema to Chuck's ethos and what he's been railing against."

But another source speaking on the condition of anonymity says Schwab already struggles enough with channel conflict between RIAs and its branches. Tossing 14,000 additional LPL advisors into that mêlée would assure  more discord than Schwab CEO Walter Bettinger has the stomach for.


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Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Dan Arnold

Nexus Strategy
Consulting Firm
Top Executive: Timothy D. Welsh




Stephen Winks

Stephen Winks

November 18, 2016 — 6:56 PM
It would be easier for Schwab to create a first rate advisory services business model in support of fiduciary duty than to try to adapt the LPL transactions model. (1) LLP has no control over their brokers and by starting with a first class advisory services model, Schwab would only attract to advisors who wish to achieve professional standing. (2) Schwab Advisory Services would be a completely different entity than Schwab Institutional but would be a big draw to Schwab Institutional as it would be the only option for largew scale institutionalized support for fiduciary duty. (3) Custodial services pricing will dramatically change when trade execution is treated as a cost center to be minimized in the client's best interest, thus a Schwab Advisory Services affiliate is a mechanism for Schwab to reprice their services to be consistent with the new fiduciary construct. SCW

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