DOL rule spurs banks that seek to ship broker-dealer business its way to counterbalance DOL downers

November 9, 2016 — 9:25 PM UTC by Janice Kirkel


Brooke's Note: This article was published Wednesday. Today, Thursday, LPL shares jumped an additional 4.52% to $37.48, a rise of $1.62. Clearly something has changed in the way people are viewing this company that goes beyond favorable signs relating to interest rates. Alex Kramm, in a report entitled: LPL Financial bear case has lost its footing raised his call from to Neutral from Sell. "Previously-imminent headwinds from compliance spending and reduced commissions may be alleviated," Kramm wrote.

Suddenly all things DOL are sending buyers scrambling to buy shares of LPL Financial  -- in spite of chief financial officer Matt Audette tamping down all speculation of a sale of the company.

"We are focused on creating long-term value for our shareholders. That is what we do each and every day, and we will continue to be our focus in the future," he said at the company’s third-quarter earnings call Nov 2.  LPL is for sale -- in whole or part -- and Wells Fargo at least makes the list of potential buyers

Shrugging off the let-down of no short-term suitcase of cash in the offing, investors sent LPL shares up 7% Friday and Monday from $31 to $32.94 after the call  closing down 10 cents on Tuesday. That only set the stage for a additional 10% burst today to a share price near $36. The latter burst may relate more to how a Trump Administration may kill the DOL rule. See: Why the DOL's Draconian and premature interpretation of its new rule is the 'end of the world as we know it' for wirehouse recruiting but a bonanza for the RIA business

What changed may be traceable to a question from Christian Bolu, a Credit Suisse Securities analyst at the earnings teleconference, about why CEO Mark Casady was sounding unusually bullish on recruitment and a 400 net new advisor target.  "Curious if you could provide a bit more color on what's driving this optimism?" he asked.

Casady painted a rainbow: He disclosed to analysts that, thanks to the DOL's new rule, LPL has tapped a potentially giant new aquifer – the brokerage forces of banks.

“We're seeing banking institutions really asking themselves the question: Should we retain our brokerage structure in the sense of owning our own broker-dealer? [The banks are thinking] we want to stay in the wealth management business but we can outsource that broker-dealer activity to LPL, and then we really, at the bank, focus on the advisors and serving our clients. And now we're just seeing larger programs come to talk to us about that as well.”

Buffer zone

What Casady seems to be saying is that even if LPL gets dinged with one-off  departures of firms like WealthPlan Partners, a $2.2-billion AUA hybrid RIA in Omaha, Neb., it may pick up advisors by the hundreds or thousands through its newly energized bank channel.

Banks are turning to LPL to offload their broker-dealer activity in order to create distance between themselves and the DOL's new regs. See: Why exactly a $2.2 billion RIA hybrid abruptly dumped LPL for Securities America -- and Schwab, Fidelity and TD Ameritrade

Asked if LPL might become too bank-oriented as a result of this prospective business and take on the ways of old-line brokers, thereby constricting the way in which it does business with RIA’s, LPL spokesman Jeffrey Mochal did not get someone to comment by press time. It's not an easy topic on which to get insight. We are still waiting on comments, as well, from Aite Group analyst Alois Pirker and Jon Holtaway of Altegra Capital. Perhaps they have been distracted by the biggest U.S. presidential upset in memory.

Yet there is a trail of bank-servicing breadcrumbs to follow that leads to the top of LPL.

LPL got into the bank servicing business in 2006, with the purchase of UVEST Financial Services Group Inc., which provided independent brokerage services to some 300 regional and community banks and credit unions.  The president and COO of UVEST was Dan Arnold, now president of LPL.  Arnold was chosen to be CFO back in 2012 as the company broadened the scope of the job to expanding the company’s business model and evaluating the consequences of change in the industry --- skills that remain timely four years later. See: LPL gets the question from Wall Street analyst: How much more can you squeeze from your financial advisors?

Arnold is no longer CFO, having vacated that seat in the spring 2015 to become LPL's  president when Robert Moore announced he was leaving the firm. In June of that year, LPL hired Audette, the former CFO of E*TRADE.

On balance

Before last Wednesday's Q&A, Audette addressed the company’s cash position. “We still have more than $500 million of cash on the balance sheet, and we have lots of things we are looking at," he said, among them investing in technology and repaying debt. “We believe the returns we could generate in buying back shares could be quite compelling." 

Chris Koegel, senior vice president at LPL, was the third executive on the call.

In mid-December 2015, under withering pressure from Marcato Capital Management and a long list of other hedge funds, the Boston-based broker-dealer spent $250 million of borrowed cash to buy LPL shares. After years of being hyper-conservative, LPL’s goal was to get a greater return on equity, hedge-fund style, by leveraging the company’s balance sheet to something approaching industry norm. See: How LPL's wolf pack of hedge funds only added to its stake, even as a mini-faction of non-hedge directors tried to hold them in check

Two months before that, Casady had announced the company was taking out an additional $550 million in debt to finance a $500 million share repurchase — including $250 million earmarked for an ASAP “accelerated” repurchase plan, which turned out to be the December 2015 buyback.

Even with that debt on its books, Casady said on last Wednesday's call that he sees DOL presenting more opportunities than obstacles including DOL-encouraged  “small-scale M&A ."

He added: "We are seeing some interest in much smaller independent broker-dealers about just shutting down and moving on to become what is sometimes called an OSJ, or an office within LPL. We've had some of that happen in this year's recruiting.”

Mentioned in this article:

LPL Financial
Asset Custodian
Top Executive: Bill Morrissey

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