LPL Financial prepares to enter the 'OSJ' channel -- this time as an owner, headed by a former executive whose staff advises $40-billion

LPL Financial will pay $140 million to go bigger in mass-market retail advice in 2023 after it scrapped Nestwise in 2013 amid OSJ howls and a slow start. See: NestWise is starting to take shape and take flight under LPL's wing -- and from under Schwab's shadow

The broker-dealer, with offices in San Diego and Fort Mill, S.C., is buying Financial Resources Group Investment Services, also headquartered in Fort Mill, and keeping CEO Bruce Miller, 69, in place to lead the charge. 

The $40-billion office of supervisory jurisdiction (OSJ) – currently an IBD client – will become a hub to roll up OSJs nationally to further its retail strategy and grab more bank customers.

“This acquisition … provides a foundation on which to accelerate expansion of several strategic growth areas, particularly in the financial institution space," says Rich Steinmeier, LPL Financial managing director and divisional president, Business Development in a release.

Miller says he sold his firm to LPL – a rare reverse breakaway -- as a long-term succession plan, but short-term, he has big shared growth ambitions.

“We want to acquire a large OSJ and, with what it costs to borrow money now, is very expensive. Having a partner like LPL makes the whole process easier.” 

LPL has about 21,000 financial advisors, 500 independent RIA firms, and 1,100 institutions as B2B clients.

Retail push

Buying an LPL OSJ may also be a less contentious way for LPL to switch lanes from a zero channel conflict B2B to the potential conflicts of serving in a B2C capacity like its reps.

In 2013, when former CEO Mark Casady scrapped Nestwise, an internal retail startup and mass-market venture, it happened, at least in part, because of opposition from its largest firms - OSJs. See: Why exactly LPL Financial nixed NestWise and how OSJs, once again, may be wagging the big dog

When it closed, NestWise had nearly 40 employees and at least three branch offices and 10 advisors. Its 2012 ADV put AUM around $130,000.

The latest LPL push is similar in that it'll be relying on people steeped in the LPL Way. 

Nestwise was headed by LPL super-veteran Esther Stearns, and Miller, prior to leaving in 2010 to start Financial Resources, worked on LPL's corporate staff for three years and became close to now-CEO Dan Arnold. 

 LPL has been Miller's firm’s sole broker-dealer. He also exclusively uses the LPL corporate RIA for fee-based business. The fee-based assets are about 65% of the firm's total $40 billion in AUA. See: A departing NestWise advisor tells what he learned from the whole experience

No more eggshells 

LPL is unlikely to face as much flak from channel conflict this time around as it enters into potential competition with its IBD clients, says Louis Diamond, president of Diamond Consultants. 

“Ten years ago, OSJs were the lifeblood of LPL," he says.

Since then, a series of OSJ breakaways have thinned the ranks.  In 2016, Ron Carson left with $2.6 billion, and in 2018 Bill Hamm’s IFP, which at one point had $9.5 billion in AUM, announced it was leaving in 2018.  

Marty Bicknell's Mariner Wealth bought The Network, a $26-billion LPL OSJ in Sacramento, Calif., See: Cheryl Bicknell drops the largest on-stage news bomb, and Dan Seivert's revenge event in sparkling San Diego got a WTH explanation for those 20-times multiples

LPL no longer needs to walk on eggshells with OSJs not only because it has fewer, but also because it can replace the revenues in-house, says Phil Waxelbaum, founder and Principal at Masada Consulting, LLC.

“Ten years ago, LPL didn't have the service model," he says. "LPL has grown its service capabilities and can now provide a direct service relationship that is competitive to these OSJs.” 

Diamond agrees. 

“A lot of the resources that OSJs provided, LPL can provide cheaper,” he says. 

"As the industry has evolved, OSJs are becoming less and less important to the organization. By buying one of the largest groups, they’re bringing more business onto their corporate platforms.”

LPL's purchase of the in-house OSJ comes with a giant perk – the retention of the OSJ's assets, Diamond says.

"If they can retain the business, then they don’t risk it leaving,” he adds. 

Evolution

LPL's purchase of its first OSJ would not be its first direct-to-investor foray. 

It previously acquired a $3 billion full-service broker in Florida and just added a second $5 billion AUA firm in Philadelphia earlier this year. See: LPL Financial buys its second full-service broker after the first one 'exceeded expectations' following a three-year pilot

LPL has also seen a shift in its large advisory teams forming RIAs and putting those assets in Fidelity and Schwab custody, which only heightened interest in buying Financial Resources Group, says Ryan Shanks, co-founder of FA Match.

 “I think the evolution of the traditional producer groups has changed drastically. They still have an affiliation with LPL, but many of them are running really large RIAs," Shanks says.

LPL's decision to purchase an OSJ is part of consolidation in the OSJ and independent platform channel, says Barnaby Audsley at Echelon Partners. 

He points out that large IBDs have purchased OSJs, such as Cetera's acquisition of 

BAR Financial and Mariner’s acquisition of The Financials Services Network.

“LPL’s acquisition of FRGIS is likely driven by revenue synergies, providing advisors with a more holistic practice management solution and further solidifying LPL’s relationship with the underlying advisors,” Audsley says.

With other firms gobbling up OSJs, LPL will lose out if it stays on the sidelines, Waxelbaum adds.

“There are many other organizations that have bought OSJs. Cetera has bought OSJs in the last few years,” Waxelbaum says. 

Major coup

Financial Resources Group  is now owned 100% by LPL, but founder Miller says the entity intends to maintain its independence.

A five-member board will oversee the firm. Miller chose three of the board members.

“LPL agreed that we need to be nimble, quick to react and if they wanted to roll us into LPL, they didn’t want that to change," Miller says.

 The client assets with this firm are more profitable and sticky because at banks and credit unions there is typically a 3- to 5-year-contract,  says Miller, who founded the firm 12 years ago. 

Getting ownership of advisors who work in community banks is a major coup, Waxelbaum says. 

“With this acquisition, LPL cements its position to be market dominant, and they've got a major market share footprint in advisors who support community banks. 

This is a very sticky business. When banks enter partnership agreements with a firm, they avoid disruption,”  he says.

No changes

Waxelbaum also suspects that this could be turning IBD advisors into a more employee-minded mindset.

“I think something else is going on. In the IBD world, there is definitely a sneaky path to employee advisors and we are headed to that.”

He says firms, like LPL, realize they can gain more return on investment with this model. “You've got to own everything. You off-set to an employee model, and the margins are much higher.” 

“LPL makes less money on an OSJ, and now they’ll right-size that relationship and make more money,” Diamond says.

Miller maintains that advisors will still remain independent and that nothing will change for them. His staff won't even move offices, he says. 

Succession plan

Miller's goal is to purchase additional OSJs at other firms and also to create a succession plan. At 69, he’s not ready to retire yet, but he says he will likely retire in the next 10 years and wanted a succession plan. 

“We wanted the three solutions from LPL: capital, resources and a succession plan. I don’t want to retire tomorrow.”

Audsley added that this deal will help Miller's firm with M&A deals. "Given LPL’s size, scale, and various offerings, there are not many businesses they do not compete with in the wealth industry. 

"This transaction will provide more capital and support to FRGIS, making them a more competitive OSJ and attractive platform for advisors," he says. 

The firm will be operated as a stand-alone business and will remain an OSJ. 

The financial payouts for its advisors won’t change, Miller says. 

Even though they’re in the same town as one of LPL’s headquarters, Miller says they’ll remain in their own building for now.