LPL will go 'toe-to-toe' with Morgan Stanley, 'launch a brand campaign,' to boost 'LPL' brand, after filing S-3 to rapidly raise up to $4 billion as needed

Rich Steinmeier wants LPL Financial to be more like Morgan Stanley and Commonwealth as it sets its sights on the $10-trillion wirehouse industry's advisors and the company puts $4-billion in capital within “shelf” reach if it makes an expensive move.

Steinmeier, appointed CEO last Oct. 24, has a strong base to launch his quest. 

He inherited IBD supremacy with 29,000 advisors and $1.8 trillion in assets and left little doubt he wants to be the undisputed industry No. 1. See: LPL Financial files S-3 to raise $4 billion after new CEO takes reins with 'bold aspiration' to lead the 'advisor marketplace' across 'all of wealth management'

“I would tell you probably that next leg on our journey now is to become the best firm in wealth management,” he said in a Mar. 6 interview with Louis Diamond, recruiter at Diamond Consultants. 

“A clear articulation, uncompromised, no asterisk, no categorization, the best firm in the marketplace supporting advisors in delivering their advice to their clients.”

He adds: "You don't just say, ‘We want to be the best IBD.’ You say, 'We want to be the best firm in wealth management. We want to go toe-to-toe with Morgan Stanley, right?' We disclose the firms that we want to be better than."

LPL issued a statement to RIABiz by email after the publication of this article that clarifies the intent of its filing of an S-3 with the Securities and Exchange Commission that quantifies its request at $4 billion – and what triggered it.

“We’ve previously disclosed that we regularly issue debt as part of our capital management strategy,” it reads. "The debt we issued in Q1 exhausted the remaining capacity on our existing shelf so we’re putting up a new shelf registration statement to replace it.

LPL adds: “With the registration “on the shelf,” the company, can go to the market as conditions become favorable with a minimum of administrative preparation and expense.”

The $4 billion may not signify any particular raise target.

“The universal shelf registration registers the offering of a total dollar amount of all of the various types of securities that may be offered, and does not need to specify a dollar amount for each type of security.”

Service, organic growth

Steinmeier's objective will take all of his managerial expertise and experience because LPL has already run the table in terms of easy M&A roll-up targets – meaning it will have to grow internally, says Philip Waxelbaum, principal of Masada Consulting, a brokerage recruiter.

“He's embarking on the better-mousetrap model,” he says. “There's nothing accretive [left] to buy.”

Steinmeier agrees that the company's principal growth engine will be organic.

“We go to market largely to win organically, not inorganically,” he told Diamond.  “We don't feel like the sun rises and sets on M&A, but we do think that inside of the dynamics of the industry we certainly have the opportunity to participate.”

To “participate” in the $10-trillion wirehouse market, LPL won't be able to rely on its old playbook, Waxelbaum says.

“That's not an area where IBDs have had a lot of success,” he says. “If you [the recruiter] had a big [breakaway-minded] broker at Morgan Stanley, it just didn't match up.”

Higher standards

Steinmeier says he is determined to raise LPL's game to a level of service way beyond its current reputation.

“When you say we are aspiring to serve the best advisors in the marketplace, it means that you can't live to a best-effort standard,” he says in the Diamond interview.

 "You have to live to a different standard. It's why we brought in a number of folks from outside this firm; to hold ourselves to a higher standard of service to deliver against our clients.

Steinmeier adds: “We're not perfect yet, but the next leg on our journey is to think about this concept of unreasonable hospitality … doing things for our clients that seem surprising, to delight them beyond their expectations.”

Steinmeier says he eschews an insular attitude to the point of shouting out winning aspects of rivals.

“There are firms that are better than us in the marketplace, and when I run into those firms, I freaking love them,” he says. 

Overcoming perceptions

"Commonwealth is fantastic in the marketplace and the way that they listen to their advisors. So let's try to be great like them. I have no problem naming other firms. I think Morgan Stanley has fantastic technology. So, let's try to be better than them, right?" See: Commonwealth cuts RIA custody fee, toggles Fidelity and Schwab as sub-custody and co-custody partners, and explains why its model puts $1 trillion of (mostly) RIA assets in reach

Of course, ‘perfection’ is also in the eye of the beholder, and Steinmeier acknowledges that he will need to undertake brand burnishing to shift perceptions.

“So much of the pivot at this firm wasn't about whether our capabilities got better,” he said. “It was about whether we were considered by the highest order advisors. Our consideration was low because folks viewed us from our past. And even when we shed that skin or shed that suit, whatever it is, we still had this legacy perception.”

He adds: “Over the last couple of years, we actually saw where that used to be, like, 80% didn't want our brand to be forward and 20% did."

“That's now shifted over the last two years to be where 80% of our advisors want our brand to be better known in the marketplace and 20% don't. And so we're going to launch our brand in the marketplace. We're going to launch a brand campaign this year that will bring us forward.”

Attracting HNW investors

Independent broker-dealers have never really achieved a white shoe following among investors or advisors, Waxelbaum says.

“It's been a working-class part of the industry,” he says.

At the upper extreme in the brokerage industry were firms like Alex. Brown, Bear Stearns, Lehman Bros. and Credit Suisse, which all folded as freestanding concerns largely because they lacked scale, with all having fewer than 1,000 advisors.

Morgan Stanley, UBS and Merrill Lynch all succeeded in sopping up a good portion of that market, he says, but the IBD market could not respond.

The RIA market also had success grabbing some top-level advisors and their ultra-high-net-worth clients.

“LPL never went for that,” he says. “It can be done. To be successful in that area, they need to take the steps necessary."

Playing to strengths

Steinmeier is certain that LPL can take the steps Diamond identifies -- subject matter expertise, expanded banking capabilities and alternative investments.

LPL has a head start with alts, Steinmeier tells Diamond.

"We've built our own custodial platform so we can onboard 2,500 different alts. We have a new buying process, fully digitized, to help sort, identify, and then deliver digitally an experience to go through the buying process itself for advisors in support of their clients.

“And then the third is, we've materially augmented our due-diligence team to put more selling agreements and more capabilities and more product onto the platform. 

"We're about to crest a hundred different selling agreements and the goal is to get towards that kind of 120 to 150 that you'd see, maybe, at the more sophisticated wirehouses.”

LPL is already has a foot in the wirehouse doors, Steinmeier says.

“We have really good conversations and I think that's what we've been emboldened by how strongly we can support really great advisor teams.”

Expanding alts

Waxelbaum doubts that LPL can go toe-to-toe with Morgan Stanley without building its own alternative investments capability to a higher level. 

Ultra-high-net-worth investors will not be satisfied to go through outsourcers like CAIS and iCapital because they don't want to pay the middleman and they want to hold more exotic investments not available on such platforms, he says. 

Where LPL will struggle is in taking on the banking capabilities of the wirehouses – particularly Bank of America/Merrill, Wells Fargo and UBS, which are all top-tier banks.

Diamond also emphasizes that banking presents a unique challenge to compete with wirehouses.

“Banking and lending are typically critically important,” he tells Steinmeier in the interview. “So it sounds like you've noticed where maybe you've lost deals or where you're not showing up the way that you could or that you should in the market.”

Uncompromised capabilities

Steinmeier says LPL identifies checking, credit card capabilities, and securities-based lines of credit as banking areas it needs to build up. 

“I can go on down the list, but we're acting with great intentionality around serving, helping advisors serve high-net-worth families with uncompromised capabilities that you would expect to see at the most sophisticated firms. That's been a journey we've been on over the last several years.”

Of course, there are risks for LPL to invest its capital into new frontiers of wealth management, Waxelbaum says.

“The internal rate of return is high at IBDs is high precisely because it is not as capital intensive,” he says.